Forecasts and Reactivity

Abstract: Expectations about the future state of the world, regions, companies, or goods influence peoples’ decisions. Expectations are shaped by the available forecasts of experts from the various markets. In man-made markets, the forecasters’ estimates do not only influence the peoples’ expectations and the decisions based on them, but thereby also the actual outcome. However, this reactivity does not exist in any market. We compare reactive markets where forecasters’ estimates influence the outcome, namely the stock and the art market, with a non-reactive market, namely the market for weather forecasts. We exploit this difference in reactivity to explain the diverse incentives for forecasters and their resulting forecasting behavior as well as the distinct institutional setting of these markets.