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A maximum likelihood approach to combining forecasts

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  • Levy, Gilat
  • Razin, Ronny

Abstract

We model an individual who wants to learn about a state of the world. The individual has a prior belief and has data that consist of multiple forecasts about the state of the world. Our key assumption is that the decision maker identifies explanations that could have generated this data and among these focuses on those that maximize the likelihood of observing the data. The decision maker then bases her final prediction about the state on one of these maximum likelihood explanations. We show that in all the maximum likelihood explanations, moderate forecasts are just statistical derivatives of extreme ones. Therefore, the decision maker will base her final prediction only on the information conveyed in the relatively extreme forecasts. We show that this approach to combining forecasts leads to a unique prediction, and a simple and dynamically consistent way to aggregate opinions.

Suggested Citation

  • Levy, Gilat & Razin, Ronny, 2021. "A maximum likelihood approach to combining forecasts," LSE Research Online Documents on Economics 104116, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:104116
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    File URL: http://eprints.lse.ac.uk/104116/
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    References listed on IDEAS

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    6. Gilat Levy & Ronny Razin, 2012. "When do simple policies win?," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 49(3), pages 621-637, April.
    7. Benjamin Enke & Florian Zimmermann, 2019. "Correlation Neglect in Belief Formation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(1), pages 313-332.
    8. Gilboa, Itzhak & Schmeidler, David, 2010. "Simplicity and likelihood: An axiomatic approach," Journal of Economic Theory, Elsevier, vol. 145(5), pages 1757-1775, September.
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    11. , & , & ,, 2016. "Fragility of asymptotic agreement under Bayesian learning," Theoretical Economics, Econometric Society, vol. 11(1), January.
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    13. Erik Eyster & Georg Weizsäcker, 2011. "Correlation Neglect in Financial Decision-Making," Discussion Papers of DIW Berlin 1104, DIW Berlin, German Institute for Economic Research.
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    Cited by:

    1. Olivier Compte, 2023. "Belief formation and the persistence of biased beliefs," Papers 2310.08466, arXiv.org.
    2. Kfir Eliaz & Simone Galperti & Ran Spiegler, 2022. "False Narratives and Political Mobilization," Papers 2206.12621, arXiv.org.

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    More about this item

    Keywords

    maximum likelihood; combining forecasts; misspecified models;
    All these keywords.

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

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