Eliciting and Evaluating Expert Forecasts

This note emphasizes the idea that managers will often want to ask experts to express their opinions about important business risks using the precise language of probability. Examples are drawn from the 2008 financial crisis and involve value-at-risk financial reporting. The second half of this note explains how a manager might use a scoring rule to evaluate the quality of experts' probability forecasts. This note is intended to accompany an instructor's own real-time forecasting exercise where students forecast, at the beginning of a week, quantities and events that will be realized by the end of the week. The quantities and events may include stock prices, commodity prices, interest rates, exchange rates, bond ratings, political votes, movie box-office revenues, Nielsen television ratings, weather events, athletic event attendance, and so on.