The Real Effects of Overconfidence and Fundamental Uncertainty Shocks

51 Pages Posted: 27 Dec 2017 Last revised: 19 Jan 2018

Date Written: December 22, 2017

Abstract

This study provides estimates of the real effects of macro-uncertainty de- composed into fundamental and overconfidence bias components. Crucially, overconfidence biases lower ex-ante measures of uncertainty, while fundamen- tal uncertainty raises both ex-ante and ex-post measures. This distinction is useful since the estimates on the real effects of the overconfidence component of uncertainty mitigate endogeneity concerns. I first document evidence for overconfidence biases from survey density forecasts in the US survey of pro- fessional forecasters. Then, using a sign and zero restrictions identification scheme in a vector autoregression (VAR), I find that increases in fundamental uncertainty and declines in overconfidence tend to lower real activity.

Keywords: uncertainty, overconfidence, survey forecasts

JEL Classification: C32, D84, E37

Suggested Citation

Ambrocio, Gene, The Real Effects of Overconfidence and Fundamental Uncertainty Shocks (December 22, 2017). Bank of Finland Research Discussion Paper No. 37/2017, Available at SSRN: https://ssrn.com/abstract=3092549

Gene Ambrocio (Contact Author)

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

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