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The Strategy of Professional Forecasting

Author

Listed:
  • Marco Ottaviani

    (London Business School)

  • Peter Norman Sorensen

    (University of Copenhagen, Institute of Economics)

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

Suggested Citation

  • Marco Ottaviani & Peter Norman Sorensen, 2001. "The Strategy of Professional Forecasting," Discussion Papers 01-09, University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:kuiedp:0109
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Forecasting; Contest; Reputation; Cheap Talk;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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