The Strategy of Professional Forecasting
London Business School Economics Discussion Paper No. DP 2001/8
30 Pages Posted: 4 Dec 2001
Date Written: August 2001
This paper develops and compares two theories of strategic behaviour 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' behaviour, forecasts are biased toward the prior mean. Otherwise, equilibrium forecasts are unbiased but imprecise.
JEL Classification: D82, D83, G20, J30
Suggested Citation: Suggested Citation