Overreaction and Working Memory

46 Pages Posted: 19 Oct 2020 Last revised: 13 May 2021

See all articles by Hassan Afrouzi

Hassan Afrouzi

Columbia University

Spencer Yongwook Kwon

Harvard University

Augustin Landier

HEC

Yueran Ma

University of Chicago - Booth School of Business

David Thesmar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: October 2020

Abstract

We study how biases in expectations vary across different settings, through a large-scale randomized experiment where participants forecast stable random processes. The experiment allows us to control the data generating process and the participants’ relevant information sets, so we can cleanly measure forecast biases. We find that forecasts display significant overreaction to the most recent observation. Moreover, overreaction is especially pronounced for less persistent processes and longer forecast horizons. We also find that commonly-used expectations models do not easily account for the variation in overreaction across settings. We provide a theory of expectations formation with imperfect utilization of past information. Our model closely fits the empirical findings.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Suggested Citation

Afrouzi, Hassan and Kwon, Spencer Yongwook and Landier, Augustin and Ma, Yueran and Thesmar, David, Overreaction and Working Memory (October 2020). NBER Working Paper No. w27947, Available at SSRN: https://ssrn.com/abstract=3714439

Hassan Afrouzi (Contact Author)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Spencer Yongwook Kwon

Harvard University

1875 Cambridge Street
Cambridge, MA 02138
United States

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

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
9
Abstract Views
296
PlumX Metrics