TY - JOUR
T1 - The strategy of professional forecasting
AU - Ottaviani, Marco
AU - Sørensen, Peter Norman
N1 - JEL Classification: D82, G29
PY - 2006
Y1 - 2006
N2 - We develop and compare two theories of professional forecasters’ strategic behavior. The first theory, reputational cheap talk, posits that forecasters endeavor to convince 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 expects forecasters to report their posterior expectations honestly, then forecasts are shaded toward the prior mean. With correct market expectations, equilibrium forecasts are imprecise but not shaded. The second theory posits that forecasters compete in a forecasting contest with pre-specified rules. In a winner-take-all contest, equilibrium forecasts are excessively differentiated
AB - We develop and compare two theories of professional forecasters’ strategic behavior. The first theory, reputational cheap talk, posits that forecasters endeavor to convince 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 expects forecasters to report their posterior expectations honestly, then forecasts are shaded toward the prior mean. With correct market expectations, equilibrium forecasts are imprecise but not shaded. The second theory posits that forecasters compete in a forecasting contest with pre-specified rules. In a winner-take-all contest, equilibrium forecasts are excessively differentiated
KW - Faculty of Social Sciences
KW - cheap talk
KW - reputation
KW - forecasting
U2 - 10.1016/j.jfineco.2005.08.002
DO - 10.1016/j.jfineco.2005.08.002
M3 - Journal article
SN - 0304-405X
VL - 81
SP - 441
EP - 466
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 2
ER -