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Post financial forecasting game theory and decision making

Author

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  • Song, Ziyu
  • Wu, Shan

Abstract

This paper examines the post-forecasting issue where predictions influence behavior and render original forecasts obsolete. Using game-theory models, we analyze two player types: econometricians with predictions and normal individuals. Our study suggests that late-moving individuals should not participate, while early-mover probabilities in Bayesian games are beneficial. Improved prediction accuracy benefits econometricians but has little impact on normal individuals. Obtaining prediction information incurs a positive cost, overlooked with high accuracy. These findings, supported by preference, uncertainty, information price, and market efficiency analyses, have important implications for investors using forecasting information in financial markets.

Suggested Citation

  • Song, Ziyu & Wu, Shan, 2023. "Post financial forecasting game theory and decision making," Finance Research Letters, Elsevier, vol. 58(PA).
    • Handle: RePEc:eee:finlet:v:58:y:2023:i:pa:s1544612323006608
    DOI: 10.1016/j.frl.2023.104288
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    More about this item

    Keywords

    Post-forecasting issue; Stochastic game; Prediction accuracy; Information cost;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General

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