The strategy of professional forecasting

Citation

(2007), "The strategy of professional forecasting", Strategic Direction, Vol. 23 No. 2. https://doi.org/10.1108/sd.2007.05623bad.006

The strategy of professional forecasting

The strategy of professional forecasting

Ottaviani M., Sorensen P.N. Journal of Financial Economics, August 2006, Vol. 81 No. 2

Purpose – to compare the reputational cheap talk with the forecasting contest theory to explain financial forecasts. Design/methodology/approach – models a number of forecasters who issue forecasts simultaneously, and who have heterogeneous private information. Compares honest and strategic forecasts. Extends the reputational cheap talk hypothesis as a game, to include herd behavior and forecaster talent. Models the forecasting contest, where the most accurate forecast wins a prize, which is shared among the most accurate forecasters. Findings – finds that, under reputational cheap talk, deviation from the truth occurs when sophisticated forecasters report conservatively to appear better informed than they are. So, if the market thinks them strategic, expects forecasts to be imprecise but not shaded. Under the forecasting contest, shows that forecasting a different result to the honest forecast has a greater chance of winning because the lower the forecast density, the less the competition for the prize. Taking the empirical work of Zitzewitz (2001), notes the presence of exaggeration, rather than herding, in I/B/E/S forecasts, consistent only with the contest theory. Research limitations/implications – admits that empirical application needs to resolve the problem of public information. Since honest forecasting is an equilibrium only in its absence. Originality/value – argues that forecasts are usually biased, one way or another.