Combining expert‐adjusted forecasts

• Author: Philip Hans Franses,Dick Dijk
• DOI: http://doi.org/10.1002/for.2570
• Published date: 01 August 2019
• Date: 01 August 2019

Received: 22 June 2018 Revised: 19 October 2018 Accepted: 7 January 2019

DOI: 10.1002/for.2570

RESEARCH ARTICLE

Combining expert-adjusted forecasts

Dick van Dijk Philip Hans Franses

Econometric Institute, Erasmus University

Rotterdam, Rotterdam,The Netherlands

Correspondence

Philip Hans Franses, Econometric

Institute, Erasmus University Rotterdam,

Burg. Oudlaan 50, 3062 PA,Rotterdam,

The Netherlands.

Email: franses@ese.eur.nl

Abstract

It is well known that a combination of model-based forecasts can improve upon

each of the individual constituent forecasts. Most forecasts available in practice

are, however, not purely based on econometric models but entail adjustments,

where experts with domain-specific knowledge modify the original model fore-

casts. There is much evidence that expert-adjusted forecasts do not necessarily

improve the pure model-based forecasts. In this paper we show, however, that

combined expert-adjusted model forecasts can improve on combined model

forecasts, in the case when the individual expert-adjusted forecasts are not bet-

ter than their associated model-based forecasts. Wediscuss various implications

of this finding.

KEYWORDS

combined expert forecasts, expert adjustment, forecast combination

1INTRODUCTION

The combination of forecasts is a common and sensi-

ble practice in many empirical situations. There is ample

evidence that combined or averaged forecasts outper-

form their individual constituent forecasts. As discussed

in Wallis (2014), the notion that the “wisdom of the

crowd” may outperform forecasts of specific individuals

goes back at least to Galton (1907). The earliest, more for-

mal, account of this phenomenon is provided by Bates and

Granger (1969), where it is shown that the combination

of two model-based forecasts can improve upon each of

the individual model forecasts. The extensive surveys of

applications of forecast combinations provided in Clemen

(1989) and Timmermann (2006) demonstrateits popularity

and success in various areas in economics and finance.

Bates and Granger (1969), and many others following,

have mainly relied on the combination of econometric

model forecasts. In practice, however, for many pub-

licly available forecasts (like those of the International

Monetary Fund or the World Bank) we do not know if

these forecasts are fully based on econometric models or

whether they originate immediately from personal exper-

tise, or a combination of the two. In fact, there is sub-

stantial empirical evidence that quite rarely it is the pure

model-based forecast that is used and published, but rather

many forecasts seem to be first adjusted based on expert

opinion. Such expert-adjusted forecasts could be contained

in, for example, the Survey of Professional Forecasters and

the Consensus Economics survey-based forecasts, where

some forecasters could rely on econometric modes and

manually adjust the forecasts that come out of those mod-

els. Expert adjustment can entail adding a number to the

model forecast, or changing the value of a parameter in

the underlying econometric model, or changing the value

of an explanatory variable at the forecast origin, amongst

others.

Obviously,experts adjust model-based forecasts with the

best of intentions (or at least one may hope so); that is,

in particular they aim to improve the accuracy of their

forecasts. Interestingly,there is much recent literature doc-

umenting that at the individual level experts fail to reach

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© 2019 The Authors Journal of ForecastingPublished by John Wiley & Sons Ltd.

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