New Experimental Evidence on Expectations Formation
By A. Landier, Yueran Ma, David Thesmar. AEA Randomized Controlled Trials, 2017
52 citations recorded by the source corpus.
In this paper, we measure belief formation in an experimental setting where agents are incentivized to provide accurate forecasts of a random variable, drawn from a stable and simple statistical process. Using these data, we estimate an empirical model that builds on the recent literature on expectation dynamics: It nests rational expectations, but also allows for extrapolation and under-reaction. Our findings are threefold. First, the rational expectation hypothesis is strongly rejected in our setting. Second, both extrapolation and underreaction patterns are statistically discernible in the data, but extrapolation quantitatively dominates. Third, our model coefficients are very robust to changes in experimental setting: They do not depend on process parameters, individual characteristics or framing. These large and stable deviations from rationality occur even though the forecasting exercise is simple and transparent.
Subfields: Management Science and Operations Research, Safety Research
View Paper: https://www.semanticscholar.org/paper/cdc494f5287c3da71c92977d541b630ab01d4a1c
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In Management Science and Operations Research
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Citations in the corpus
- Psychology-based Models of Asset Prices and Trading Volume (2018, background): “Shiller (1981) and LeRoy and Porter (1981) show that aggregate stock market prices are “excessively” volatile, in the sense that it is hard to justify their fluctuations on the basis of rationally-varying forecasts of the future cash flows paid to investors.”
- IQ, Expectations, and Choice (2019, unknown): “Beyond these differences in the knowledge and conceptualization of inflation, we find low-IQ individuals make larger errors when forecasting generic mean-reverting processes, especially for processes that have lower volatility and hence are easier to forecast (Landier et al. (2018)). This result lik”