Biases in Expectations: Experimental Evidence

41 Pages Posted: 3 Oct 2017 Last revised: 16 Feb 2020

See all articles by Augustin Landier

Augustin Landier

HEC

Yueran Ma

University of Chicago - Booth School of Business

David Thesmar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: February 13, 202

Abstract

We study belief formation in a large-scale experiment where participants forecast a stable random process, across a rich set of conditions. We have three main findings. First, the rational expectations hypothesis is strongly rejected and we find little evidence of learning over time. Second, expectations display over-reaction, which is particularly pronounced for less persistent processes, consistent with evidence in macroeconomic forecasts (Bordalo et al, 2019). Third, commonly-used expectations models, estimated on our experimental data, do not easily account for the way over-reaction varies with process persistence. A simple model with "forward-looking extrapolation" performs well in accounting for this empirical regularity.

Keywords: Expectation formation

JEL Classification: D03; D84; D9; E7; G4

Suggested Citation

Landier, Augustin and Ma, Yueran and Thesmar, David, Biases in Expectations: Experimental Evidence (February 13, 202). Available at SSRN: https://ssrn.com/abstract=3046955 or http://dx.doi.org/10.2139/ssrn.3046955

Augustin Landier

HEC ( email )

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HOME PAGE: http://https://sites.google.com/site/augustinlandier/

Yueran Ma

University of Chicago - Booth School of Business ( email )

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David Thesmar (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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United Kingdom

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