The Micro and Macro of Managerial Beliefs

65 Pages Posted: 25 Jun 2018 Last revised: 6 Jul 2021

Date Written: May 25, 2021


This paper studies how biases in managerial beliefs affect managerial decisions, firm
performance, and the macroeconomy. Using a new survey of US managers, I establish
three facts. (1) Managers are not overoptimistic: sales growth forecasts on average do
not exceed realizations. (2) Managers are overprecise: they underestimate future sales
growth volatility. (3) Managers overextrapolate: their forecasts are too optimistic after
positive shocks and too pessimistic after negative shocks. To quantify the implications, I
estimate a dynamic general equilibrium model in which managers of heterogeneous firms
use a subjective beliefs process to make forward-looking hiring decisions. Overprecision
and overextrapolation lead managers to overreact to firm-level shocks and overspend
on adjustment costs, destroying 2.1 to 6.8 percent of the typical firm’s value. Pervasive
overreaction leads to excess volatility and reallocation, lowering consumer welfare by 0.5
to 2.3 percent relative to the rational-expectations equilibrium. These findings suggest
overreaction could amplify asset-price and business-cycle fluctuations.

Keywords: Managers, beliefs, reallocation, optimism, overprecision, overconfidence, overextrapolation

JEL Classification: G31, G32, E7, G4, D25, D84, M25

Suggested Citation

Barrero, Jose Maria, The Micro and Macro of Managerial Beliefs (May 25, 2021). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: or

Jose Maria Barrero (Contact Author)

ITAM - Business School ( email )

Rio Hondo No. 1
Col. Tizapan-San Angel Alc. Alvaro Obregon
Ciudad de Mexico, 01000

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