The Wisdom of Competitive Crowds

37 Pages Posted: 13 Sep 2011 Last revised: 23 Mar 2015

Kenneth C. Lichtendahl Jr.

University of Virginia - Darden School of Business

Yael Grushka-Cockayne

University of Virginia - Darden School of Business

Phillip E. Pfeifer

University of Virginia - Darden School of Business

Date Written: July 12, 2013

Abstract

When several individuals are asked to forecast an uncertain quantity, they often face implicit or explicit incentives to be the most accurate. Despite the desire to elicit honest forecasts, such competition induces forecasters to report strategically and non-truthfully. The question we address is whether the competitive crowd's forecast (the average of strategic forecasts) is more accurate than the truthful crowd's forecast (the average of truthful forecasts from the same forecasters). We analyze a forecasting competition in which a prize is awarded to the forecaster whose point forecast is closest to the actual outcome. Before reporting a forecast, we assume each forecaster receives two signals: one common and one private. These signals represent the forecasters' past shared and personal experiences relevant for forecasting the uncertain quantity of interest. In a set of equilibrium results, we characterize the nature of the strategic forecasts in this game. As the correlation among the forecasters' private signals increases, the forecasters switch from using a pure to a mixed strategy. In both cases, forecasters exaggerate their private information and thereby make the competitive crowd's forecast more accurate than the truthful crowd's forecast.

Keywords: forecasting competitions, strategic forecasting, expert opinion, averaging opinions, combining forecasts.

JEL Classification: D41, D82

Suggested Citation

Lichtendahl, Kenneth C. and Grushka-Cockayne, Yael and Pfeifer, Phillip E., The Wisdom of Competitive Crowds (July 12, 2013). Darden Business School Working Paper No. 1926330. Available at SSRN: https://ssrn.com/abstract=1926330 or http://dx.doi.org/10.2139/ssrn.1926330

Kenneth C. Lichtendahl Jr.

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Yael Grushka-Cockayne (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Phillip E. Pfeifer

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4803 (Phone)

HOME PAGE: http://www.darden.virginia.edu/faculty/Pfeifer.htm

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