The Strategy of Professional Forecasting

Marco Ottaviani and Peter Sørensen

No 2004/05, FRU Working Papers from University of Copenhagen. Department of Economics. Finance Research Unit

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 expects forecaster honesty, forecasts are shaded toward the prior mean. With correct market expectations, equilibrium forecasts are imprecise but not shaded.

Keywords: forecasting, contest, reputation; cheap talk (search for similar items in EconPapers)
JEL-codes: C72 D82 D83 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2004-04
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: The strategy of professional forecasting (2006)
Working Paper: The Strategy of Professional Forecasting (2001)
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