Improving Forecasts Using Equally Weighted Predictors

20 Pages Posted: 17 Aug 2013 Last revised: 19 Oct 2017

See all articles by Andreas Graefe

Andreas Graefe

Ludwig Maximilians University of Munich - Department of Communication Science and Media Research

Date Written: August 16, 2013

Abstract

The usual procedure for developing linear models to predict any kind of target variable is to identify a subset of most important predictors and to estimate weights that provide the best possible solution for a given sample. The resulting “optimally” weighted linear composite is then used when predicting new data. This approach is useful in situations with large and reliable datasets and few predictor variables. However, a large body of analytical and empirical evidence since the 1970s shows that the weighting of variables is of little, if any, value in situations with small and noisy datasets and a large number of predictor variables. In such situations, including all relevant variables is more important than their weighting. These findings have yet to impact many fields. This study uses data from nine established U.S. election-forecasting models whose forecasts are regularly published in academic journals to demonstrate the value of weighting all predictors equally and including all relevant variables in the model. Across the ten elections from 1976 to 2012, equally weighted predictors reduced the forecast error of the original regression models on average by four percent. An equal-weights model that includes all variables provided well-calibrated forecasts that reduced the error of the most accurate regression model by 29% percent.

Keywords: equal weights, index method, econometric models, presidential election forecasting, Moral Algebra

JEL Classification: D7, D81, C4, C5

Suggested Citation

Graefe, Andreas, Improving Forecasts Using Equally Weighted Predictors (August 16, 2013). Journal of Business Research, 68(8), 1792-1799. Available at SSRN: https://ssrn.com/abstract=2311131

Andreas Graefe (Contact Author)

Ludwig Maximilians University of Munich - Department of Communication Science and Media Research ( email )

Geschwister-Scholl-Platz 1
Munich, Bavaria 80539
Germany

HOME PAGE: http://www.andreas-graefe.org

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