Estimating Loss Functions of Experts

Tinbergen Institute Discussion Paper No. 11-177/4

29 Pages Posted: 23 Dec 2011

See all articles by Philip Hans Franses

Philip Hans Franses

Erasmus University Rotterdam (EUR) - Department of Econometrics

Rianne Legerstee

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

Richard Paap

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

Date Written: December 15, 2011

Abstract

We propose a new and simple methodology to estimate the loss function associated with experts' forecasts. Under the assumption of conditional normality of the data and the forecast distribution, the asymmetry parameter of the lin-lin and linex loss function can easily be estimated using a linear regression. This regression also provides an estimate for potential systematic bias in the forecasts of the expert. The residuals of the regression are the input for a test for the validity of the normality assumption. We apply our approach to a large data set of SKU-level sales forecasts made by experts and we compare the outcomes with those for statistical model-based forecasts of the same sales data. We find substantial evidence for asymmetry in the loss functions of the experts, with underprediction penalized more than overprediction.

Keywords: model forecasts, expert forecasts, loss functions, asymmetry, econometric models

JEL Classification: C50, C53

Suggested Citation

Franses, Philip Hans and Legerstee, Rianne and Paap, Richard, Estimating Loss Functions of Experts (December 15, 2011). Tinbergen Institute Discussion Paper No. 11-177/4. Available at SSRN: https://ssrn.com/abstract=1973513 or http://dx.doi.org/10.2139/ssrn.1973513

Philip Hans Franses (Contact Author)

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)

Rianne Legerstee

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

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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