Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/331479 
Year of Publication: 
2025
Series/Report no.: 
ISER Discussion Paper No. 1293
Publisher: 
Osaka University, Institute of Social and Economic Research (ISER), Osaka
Abstract: 
We experimentally evaluate three behavioral models of expectation formation that predict overreaction to new information: overconfidence in private signals, misperceptions about the persistence of the data-generating process (DGP), and diagnostic expectations. In our main experiment, participants repeatedly forecast the contemporaneous and one-step-ahead values of a random variable. They are incentivized for accuracy, informed of the exact DGP and its past history, and provided with noisy signals about the unobserved contemporaneous value. One treatment features a persistent AR(1) process, while another has no persistence. We also report on an experiment with no noisy signals. At the individual level, we find systematic overreaction even when the DGP is not persistent and regardless of whether a signal-extraction problem is present. By contrast, consensus (mean) forecasts exhibit underreaciton, consistent with evidence from other studies. Overall, our results indicate that misperceptions about persistence provide the most compelling explanation for the observed patterns of expectation formation.
Subjects: 
Expectation formation
Overreaction
Signal extraction
Diagnostic expectations
Misperception
Overconfidence
JEL: 
C91
D03
D84
G41
Document Type: 
Working Paper

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