The Strategy of Professional Forecasting∗

We develop and compare two theories of professional forecasters’ strategic behavior. The first theory, reputational cheap talk, posits that 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 expects the 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. In the second theory, forecasters compete in a forecasting contest with prespecified rules. In a winner-take-all contest, equilibrium forecasts are excessively differentiated.