A maximum likelihood approach to combining forecasts

Levy, Gilat and Razin, Ronny (2021) A maximum likelihood approach to combining forecasts. Theoretical Economics, 16 (1). 49 - 71. ISSN 1933-6837

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Abstract

We model an individual who wants to learn about a state of the world. The individual has a prior belief and has data that consist of multiple forecasts about the state of the world. Our key assumption is that the decision maker identifies explanations that could have generated this data and among these focuses on those that maximize the likelihood of observing the data. The decision maker then bases her final prediction about the state on one of these maximum likelihood explanations. We show that in all the maximum likelihood explanations, moderate forecasts are just statistical derivatives of extreme ones. Therefore, the decision maker will base her final prediction only on the information conveyed in the relatively extreme forecasts. We show that this approach to combining forecasts leads to a unique prediction, and a simple and dynamically consistent way to aggregate opinions.

Item Type:	Article
Official URL:	https://onlinelibrary.wiley.com/journal/15557561
Additional Information:	© 2020 The Authors
Divisions:	Economics
Subjects:	H Social Sciences > HB Economic Theory
Date Deposited:	23 Apr 2020 08:54
Last Modified:	16 Apr 2024 23:13
URI:	http://eprints.lse.ac.uk/id/eprint/104116

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