Quantifying Qualitative Survey Data: New Insights on the (Ir)Rationality of Firms' Forecasts

81 Pages Posted: 11 Jul 2020

See all articles by Alexandros Botsis

Alexandros Botsis

University of Birmingham - Department of Economics

Christoph Görtz

University of Birmingham - Department of Economics

Plutarchos Sakellaris

Athens University of Economics and Business

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Date Written: May 18, 2020

Abstract

Using a novel data set that combines firms' qualitative survey-based sales forecasts with their quantitative balance-sheet data on realized sales, we document that only major forecast errors (those in the two tails of the distribution) are predictable and display auto-correlation. This result is a particular violation of the Full Information Rational Expectations hypothesis that requires explanation. In contrast, minor forecast errors are neither predictable nor auto-correlated. To arrive at this finding, we develop a novel methodology to quantify qualitative survey data on forecasts. It is generally applicable when quantitative information, e.g. from firm balance sheets, is available on the realization of the forecasted variable. To explain our empirical result, we provide a model of rational inattention. When operating in market environments where information processing is more costly, firms optimally limit their degree of attention to information. This results in larger absolute forecast errors that become predictable and auto-correlated.

Keywords: Survey Data, Firm Data, Expectations, Forecast Errors, Rational Inattention

JEL Classification: C53, C83, D22, D84, E32

Suggested Citation

Botsis, Alexandros and Görtz, Christoph and Sakellaris, Plutarchos, Quantifying Qualitative Survey Data: New Insights on the (Ir)Rationality of Firms' Forecasts (May 18, 2020). Available at SSRN: https://ssrn.com/abstract=3630366 or http://dx.doi.org/10.2139/ssrn.3630366

Alexandros Botsis

University of Birmingham - Department of Economics ( email )

United Kingdom

Christoph Görtz

University of Birmingham - Department of Economics ( email )

United Kingdom

Plutarchos Sakellaris (Contact Author)

Athens University of Economics and Business ( email )

76 Patission Street
Athens, 104 34
Greece
+302108203304 (Phone)
+3012108203383 (Fax)

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