Motivated Beliefs in Macroeconomic Expectations

Abstract

Motivated beliefs are an important framework for understanding macroeconomic expectations. We
extend popular motivated belief models and show that they predict an upward sloping term structure of optimism (horizon bias). Analyzing professional forecasts over the past fifty years, we find that forecast errors exhibit both optimism bias and horizon bias. Further, consistent with the conceptual framework of Bénabou (2015), we show that time-series variation in the optimism bias is related to theory-based drivers of motivated beliefs like uncertainty and anxiety. Finally, we find that forecasters react more strongly to good than bad news, consistent with motivated beliefs.

Keywords: Motivated beliefs, Optimal expectations, Wishful thinking, Economic forecasting, Economic models, Expectations, Optimism bias, Survey forecasts, Macroeconomic forecasts.

JEL Classification: C53, D83, D84, D9, E37, E7