Do Experts Incorporate Statistical Model Forecasts and Should They?

Tinbergen Institute Discussion Paper 11-141/4

52 Pages Posted: 4 Oct 2011

See all articles by Rianne Legerstee

Rianne Legerstee

Erasmus University Rotterdam (EUR) - Department of Econometrics; Tinbergen Institute

Philip Hans Franses

Erasmus University Rotterdam (EUR) - Department of Econometrics

Richard Paap

Erasmus University Rotterdam (EUR) - Department of Econometrics; Tinbergen Institute; Erasmus Research Institute of Management (ERIM)

Date Written: September 30, 2011

Abstract

Experts can rely on statistical model forecasts when creating their own forecasts. Usually it is not known what experts actually do. In this paper we focus on three questions, which we try to answer given the availability of expert forecasts and model forecasts. First, is the expert forecast related to the model forecast and how? Second, how is this potential relation influenced by other factors? Third, how does this relation influence forecast accuracy? We propose a new and innovative two-level Hierarchical Bayes model to answer these questions. We apply our proposed methodology to a large data set of forecasts and realizations of SKU-level sales data from a pharmaceutical company. We find that expert forecasts can depend on model forecasts in a variety of ways. Average sales levels, sales volatility, and the forecast horizon influence this dependence. We also demonstrate that theoretical implications of expert behavior on forecast accuracy are reflected in the empirical data.

Keywords: model forecasts, expert forecasts, forecast adjustment, Bayesian analysis, endogeneity

JEL Classification: C11, C53

Suggested Citation

Legerstee, Rianne and Franses, Philip Hans and Paap, Richard, Do Experts Incorporate Statistical Model Forecasts and Should They? (September 30, 2011). Tinbergen Institute Discussion Paper 11-141/4. Available at SSRN: https://ssrn.com/abstract=1938227 or http://dx.doi.org/10.2139/ssrn.1938227

Rianne Legerstee (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

HOME PAGE: http://people.few.eur.nl/legerstee/

Tinbergen Institute ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

HOME PAGE: http://www.tinbergen.nl

Philip Hans Franses

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1278 (Phone)
+31 10 408 9162 (Fax)

Richard Paap

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Tinbergen Institute ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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