Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/235009
Authors: 
Hagenhoff, Tim
Lustenhouwer, Joep
Year of Publication: 
2020
Series/Report no.: 
Discussion Paper Series No. 686
Publisher: 
University of Heidelberg, Department of Economics, Heidelberg
Abstract: 
We propose a simple model of expectation formation with three distinct deviations from fully rational expectations. In particular, forecasters' expectations are sticky, extrapolate the most recent news about the current period, and depend on the lagged consensus forecast about the period being forecast. We find that all three biases are present in the Survey of Professional Forecaster as well as in the Livingston Survey, and that their magnitudes depend on the forecasting horizon. Moreover, in an over-identified econometric specification, we find that the restriction on coefficients implied by our model is always close to being satisfied and in most cases not rejected. We also stress the point that using the past consensus forecast to form expectations is a rather smart thing to do if cognitive limitations and biases cause any attempt to build an own rational forecast to fail.
Subjects: 
expectation formation
sticky expectations
extrapolation
consensus forecasts
survey data
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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