Cognitive Biases in Consumer Sentiment: the Peak-End Rule and Herding

We show that two heuristics, the peak-end rule and herding, generate biases in indexes of consumer sentiment. Both affect respondents' assessment of changes in their financial position over the past year. Conform the peak-end rule, their answers relate more to extreme detrimental monthly than to yearly changes in key financial and macro variables. These effects are stronger for more salient variables. As for herding, we document that respondents interviewed in the second round about past financial changes rely too strongly on future expectations from first-round respondents. These effects persist when we account for structural differences in sample composition or for the effect of other predictive variables. Our research shows the presence of both biases outside controlled environments and sheds new light on the relevance of sentiment indexes.

Keywords: consumer sentiment, cognitive biases, peak-end rule, herding, feedback loops

JEL Classification: G41, E71, E32

Suggested Citation: Suggested Citation

Kole, Erik and Noordegraaf-Eelens, Liesbeth and Vringer, Bas, Cognitive Biases in Consumer Sentiment: the Peak-End Rule and Herding (February 28, 2025). Tinbergen Institute Discussion Paper 2019-031/I, Available at SSRN: https://ssrn.com/abstract=3381009 or http://dx.doi.org/10.2139/ssrn.3381009