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The Strategy of Professional Forecasting

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Author Info
Marco Ottaviani (London Business School)
Peter Norman Sørensen (Institute of Economics, University of Copenhagen)

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Abstract

This paper develops and compares two theories of strategic behavior of professional forecasters. The first theory posits that forecasters compete in a forecasting contest with pre-specified rules. In equilibrium of a winner-take-all contest, forecasts are excessively differentiated. According to the alternative reputational cheap talk theory, forecasters aim at convincing the market that they are well informed. The market evaluates their forecasting talent on the basis of the forecasts and the realized state. If the market expects forecaster honesty, forecasts are shaded toward the prior mean. With correct market expectations, equilibrium forecasts are imprecise but not shaded.

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Publisher Info
Paper provided by University of Copenhagen. Department of Economics. Finance Research Unit in its series FRU Working Papers with number 2004/05.

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Length: 31 pages
Date of creation: Apr 2004
Date of revision:
Handle: RePEc:kud:kuiefr:200405

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Related research
Keywords: forecasting; contest; reputation; cheap talk;

Other versions of this item:

Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information

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