Are Expectations Formed by the Anchoring-and-Adjustment Heuristic? - An Experimental Investigation

31 Pages Posted: 20 Aug 2008 Last revised: 25 Sep 2009

See all articles by Michael W. M. Roos

Michael W. M. Roos

University of Dortmund - Lehrstuhl für Wirtschafts-un Sozialstatistik

Wolfgang J. Luhan

University of Portsmouth - Faculty of Business - Department of Economics

Date Written: August 1, 2008

Abstract

Previous experimental investigations have shown that expectations are not perfectly rational due to several forms of bias. Traditional adaptive models, however, in many cases do not perfectly describe the formation of expectations either. This paper makes two contributions to the experimental literature on the formation of expectations: First, we investigate whether subjects who have more information about the economic model than in previous studies also form biased expectations. Second, we argue that in some cases macroeconomic expectations might be formed by the anchoring-and-adjustment heuristic, which is well known in psychology. We …find that subjects' expectations are biased although our design might be more favorable to rational expectations. The anchoring-and-adjustment model of expectations is largely in line with our results.

Keywords: expectations, heuristics, anchoring, beliefs, mental models, macroeconomic experiment

JEL Classification: D84, D83, C99, E00, E30

Suggested Citation

Roos, Michael W. M. and Luhan, Wolfgang J., Are Expectations Formed by the Anchoring-and-Adjustment Heuristic? - An Experimental Investigation (August 1, 2008). Ruhr Economic Paper No. 54. Available at SSRN: https://ssrn.com/abstract=1240660 or http://dx.doi.org/10.2139/ssrn.1240660

Michael W. M. Roos (Contact Author)

University of Dortmund - Lehrstuhl für Wirtschafts-un Sozialstatistik ( email )

D-44221 Dortmund
Germany

HOME PAGE: http://www.wiso.uni-dortmund.de/~gra-miro

Wolfgang J. Luhan

University of Portsmouth - Faculty of Business - Department of Economics ( email )

Portsmouth PO4 8JF
United Kingdom

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