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Forecaster's opinion

Question 1

Say the level of the market as measured by the Dow Jones Industrial Average is currently at 12,000. A forecaster has made a prediction of 13,300 for the level of the market in one year, along with a 95% confidence interval whose lower bound is 12,500 and whose upper bound is 14,500. You know from experience that this particular forecaster tends to be both excessively optimistic and miscalibrated. Describe how you might de-bias this individual. Give a numerical example (making up relevant numbers as appropriate).

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Solution Preview

The forecaster is definitely both optimistic and miscalibrated. There are a few reasons why.

First, stock index prices and stock prices are a "random walk". One cannot predict the future of those prices based on historical data present. It is true that over the "long run" the stock prices ...

Solution Summary

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