The Inference-Forecast Gap in Belief Updating
62 Pages Posted: 20 Jul 2021 Last revised: 22 Apr 2022
Date Written: July 18, 2021
Individual forecasts of economic variables show widespread overreaction to recent news, but laboratory experiments on belief updating typically find underinference from new signals. We provide new experimental evidence to connect these two seemingly inconsistent phenomena. Building on a classic experimental paradigm, we study how people make inferences and revise forecasts in the same information environment. Participants underreact to signals when inferring about underlying states, but overreact to signals when revising forecasts about future outcomes. This gap in belief updating is largely driven by the use of different simplifying heuristics for the two tasks. Additional treatments suggest that the choice of heuristics is affected by the similarity between cues in the information environment and the belief-updating question: when forming a posterior belief, participants are more likely to rely on cues that appear similar to the variable elicited by the question.
Keywords: belief updating, forecast revision, heuristics
JEL Classification: D83, D90
Suggested Citation: Suggested Citation