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The Strategy of Professional Forecasting

  • Marco Ottaviani

    (London Business School)

  • Peter Norman Sorensen

    (University of Copenhagen, Institute of Economics)

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 has naive views on forecasters' behavior, forecasts are biased toward the prior mean. Otherwise, equilibrium forecasts are unbiased but imprecise.

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File URL: http://www.econ.ku.dk/english/research/publications/wp/2001/0109.pdf/
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Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 01-09.

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Length: 29 pages
Date of creation: Oct 2001
Date of revision:
Handle: RePEc:kud:kuiedp:0109
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