Biases in Expectations: Experimental Evidence

75 Pages Posted: 3 Oct 2017 Last revised: 3 Jun 2019

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) - Economics, Finance, Accounting (EFA)

Multiple version iconThere are 2 versions of this paper

Date Written: May 31, 2019

Abstract

We measure belief formation in a simple, large-scale experiment where participants are asked to provide forecasts of a stable random process. We use the data to analyze several expectations models put forward by the literature. Our findings are threefold. First, the rational expectations hypothesis is strongly rejected and we find little evidence of learning over time. Second, the data reject models where forecasters do not adjust the forecasting rule to properties of the data generating process. Third, an empirical model combining stickiness and forward-looking extrapolation does best in terms of explanatory power and stability. In this model, extrapolation quantitatively dominates, but stickiness makes past errors persist.

Keywords: Expectation formation; extrapolation; stickiness

JEL Classification: D03; D84

Suggested Citation

Landier, Augustin and Ma, Yueran and Thesmar, David, Biases in Expectations: Experimental Evidence (May 31, 2019). Available at SSRN: https://ssrn.com/abstract=3046955 or http://dx.doi.org/10.2139/ssrn.3046955

Augustin Landier

HEC ( email )

France
+33630006051 (Phone)

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

Yueran Ma

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

David Thesmar (Contact Author)

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA) ( email )

77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States
16172259767 (Phone)

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