Incentive-Compatible Forecasting Competitions

TL;DR

This paper develops new mechanisms for forecasting competitions that ensure truthful reporting and accurately identify the most skilled forecasters, addressing incentive issues present in traditional prize structures.

Contribution

It introduces two novel incentive-compatible mechanisms that improve the accuracy and fairness of forecasting competitions, with theoretical guarantees and practical implementability.

Findings

The first mechanism guarantees selecting the most accurate forecaster with probability higher than any other.

The second mechanism approaches perfect accuracy as the number of events increases.

The mechanisms are easy to implement and adaptable to related ranking and hiring problems.

Abstract

We initiate the study of incentive-compatible forecasting competitions in which multiple forecasters make predictions about one or more events and compete for a single prize. We have two objectives: (1) to incentivize forecasters to report truthfully and (2) to award the prize to the most accurate forecaster. Proper scoring rules incentivize truthful reporting if all forecasters are paid according to their scores. However, incentives become distorted if only the best-scoring forecaster wins a prize, since forecasters can often increase their probability of having the highest score by reporting more extreme beliefs. In this paper, we introduce two novel forecasting competition mechanisms. Our first mechanism is incentive compatible and guaranteed to select the most accurate forecaster with probability higher than any other forecaster. Moreover, we show that in the standard single-event, two-forecaster setting and under mild technical conditions, no other incentive-compatible mechanism selects the most accurate forecaster with higher probability. Our second mechanism is incentive compatible when forecasters' beliefs are such that information about one event does not lead to belief updates on other events, and it selects the best forecaster with probability approaching 1 as the number of events grows. Our notion of incentive compatibility is more general than previous definitions of dominant strategy incentive compatibility in that it allows for reports to be correlated with the event outcomes. Moreover, our mechanisms are easy to implement and can be generalized to the related problems of outputting a ranking over forecasters and hiring a forecaster with high accuracy on future events.