The Strategy of Professional Forecasting
31 Pages Posted: 27 Mar 2011
Date Written: October 22, 2001
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.
Keywords: Forecasting, Contest, Reputation, Cheap Talk
JEL Classification: D82, D83, G20, J30
Suggested Citation: Suggested Citation