Biases in Expectations: Experimental Evidence
75 Pages Posted: 3 Oct 2017 Last revised: 3 Jun 2019
Date Written: May 31, 2019
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: Suggested Citation