Strategy of professional forecasting

Ottaviani, M and Sorensen, P (2001) Strategy of professional forecasting. Working Paper. London Business School Economics Discussion Paper Series.

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 prespecified rules. In equilibrium of a winnertakeall 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 naïve views on forecasters' behaviour, forecasts are biased toward the prior mean. Otherwise, equilibrium forecasts are unbiased but imprecise.