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Separating Accuracy from Forecast Certainty: A Modified Miscalibration Measure

In: Behavioral Finance A Novel Approach

Author

Listed:
  • Doron Sonsino
  • Yaron Lahav
  • Amir Levkowitz

Abstract

Interval forecasting tasks are commonly used to test for forecast-overconfidence. Pointing at deficiencies of the methodology, we advance a modified assignment, where subjects provide point predictions and assess the likelihood of return falling within small intervals around their estimates. The difference between the subjective likelihood assessments and the realized hit rates is advanced as an improved forecast-overprecision measure. Over three incentivized studies, 163 of 195 participants overestimate their hit rates, and a closer look at the data illustrates that inaccuracy and excessive certainty act as distinct sources of overprecision. Applications where the adapted task may prove more powerful than standard interval forecasting are discussed.

Suggested Citation

  • Doron Sonsino & Yaron Lahav & Amir Levkowitz, 2020. "Separating Accuracy from Forecast Certainty: A Modified Miscalibration Measure," World Scientific Book Chapters, in: Itzhak Venezia (ed.), Behavioral Finance A Novel Approach, chapter 12, pages 283-301, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811229251_0012
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    Keywords

    Analysts Recommendations; Behavioral Biases; Behavioral Economics; Behavioral Finance; Board of Directors ; Compensation; Compensation Committee; Control; Coronavirus; Corporate Governance; COVID-19; Decision Making; Disposition Effect; Earnings Management; Elections; Emotions; Financial Crises; Financial Market Anomalies; Financial Markets; Forecast-Accuracy; Gender Differences; Heuristics; Interval Forecasting; Investment; Investor Horizon; Investors' Beliefs; IPO Under-Pricing; Life Expectancy; Myopia; Overconfidence; Pensions Industry; Policy Reforms; Polls; Portfolio Risk; Prediction Markets; Regulation; Stock Price Drifts; Time Preferences;
    All these keywords.

    JEL classification:

    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G4 - Financial Economics - - Behavioral Finance
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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