The Strategy of Professional Forecasting

London Business School Economics Discussion Paper No. DP 2001/8

30 Pages Posted: 4 Dec 2001

See all articles by Marco Ottaviani

Marco Ottaviani

Bocconi University - Department of Economics

Peter Norman Sorensen

University of Copenhagen - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 2001

Abstract

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

Ottaviani, Marco and Sorensen, Peter Norman, The Strategy of Professional Forecasting (August 2001). London Business School Economics Discussion Paper No. DP 2001/8, Available at SSRN: https://ssrn.com/abstract=291781 or http://dx.doi.org/10.2139/ssrn.291781

Marco Ottaviani (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
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Italy

Peter Norman Sorensen

University of Copenhagen - Department of Economics ( email )

Oster Farimagsgade 5
Building 26
Copenhagen K, 1353
Denmark
+45 35 32 3056 (Phone)

HOME PAGE: http://www.econ.ku.dk/sorensen

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