Are Expectations Formed by the Anchoring-and-Adjustment Heuristic? - An Experimental Investigation
31 Pages Posted: 20 Aug 2008 Last revised: 25 Sep 2009
Date Written: August 1, 2008
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: Suggested Citation