The strategy of professional forecasting

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 -