Horizon Bias in Expectations Formation

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See all articles by Stefano Cassella

Stefano Cassella

Tilburg University- School of Economics and Management

Benjamin Golez

University of Notre Dame

Huseyin Gulen

Purdue University - Krannert School of Management

Peter Kelly

University of Notre Dame

Date Written: January 2, 2021

Abstract

We provide empirical evidence that the optimism bias in expectations of economic quantities increases with the forecasting horizon. We label this empirical regularity the horizon bias. We document significant horizon bias in the macroeconomic expectations of professional forecasters, both in the U.S. and abroad. We show that horizon bias is unlikely to be the result of career concerns, asymmetric loss, information rigidities, or cognitive mistakes. We then provide theoretical support to the notion that horizon bias can arise within theories of motivated beliefs. Finally, following the conceptual framework of Benabou(2015), we test whether theory-based drivers of motivated beliefs can explain time-series variation in the horizon bias. We find strong support for many of these drivers. Overall, we offer strong evidence that motivated beliefs lead to biases in expectations formation.

Keywords: Motivated beliefs, Optimal expectations, Wishful thinking, Economic forecasting, Economic models, Expectations, Optimism Bias, Survey Forecasts

JEL Classification: C53, D03, D83, D84, D90, D91, E37

Suggested Citation

Cassella, Stefano and Golez, Benjamin and Gulen, Huseyin and Kelly, Peter, Horizon Bias in Expectations Formation (January 2, 2021). Available at SSRN: https://ssrn.com/abstract=

Stefano Cassella (Contact Author)

Tilburg University- School of Economics and Management ( email )

Professor de Moorplein 521
Tilburg, 5037
Netherlands

Benjamin Golez

University of Notre Dame ( email )

256 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
(574) 631-1458 (Phone)

HOME PAGE: http://business.nd.edu/BenGolez/

Huseyin Gulen

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Peter Kelly

University of Notre Dame ( email )

251 Mendoza
South Bend, IN 46637
United States

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