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Strategy of professional forecasting

Subject

Economics

Authors / Editors

Ottaviani M;Sorensen P

Publication Year

2001

Abstract

This paper develops and compares two theories of strategic behaviour 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 naïve views on forecasters' behaviour, forecasts are biased toward the prior mean. Otherwise, equilibrium forecasts are unbiased but imprecise.

Series Number

DP 2001/8

Series

Economics Discussion Paper Series

Available on ECCH

No


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