Forecast Errors and Forecast Sufficiency Under Ambiguity
Speaker: Prof Ignacio Esponda
Affiliaiton: UC Santa Barbara
Zoom: https://uqz.zoom.us/j/82603079317
Abstract: We propose forecast sufficiency as a principle of decision-making under uncertainty: once a person forms a probability forecast, behavior should depend only on that forecast—not on how it was formed. This principle is central to many economic models but has rarely been tested directly. We design an experiment with Risk and Ambiguity treatments and elicit subjective forecasts, enabling us to distinguish belief formation from belief use. We find that forecast sufficiency fails: individuals act differently when a probability is known (Risk) versus when it is forecasted to be the same (Ambiguity). This failure explains about half of the behavioral gap between the two treatments. However, once forecasts are corrected for base rate neglect, forecast sufficiency largely holds, so the observed behavior can be explained without invoking violations of the principle.
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