Cognitive Biases and Consumer Sentiment

Erik Kole (), Liesbeth Noordegraaf-Eelens and Bas Vringer
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Liesbeth Noordegraaf-Eelens: Erasmus University Rotterdam
Bas Vringer: Erasmus University Rotterdam

No 19-031/I, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We show that two heuristics, the peak-end rule and herding, generate biases in indexes of consumer sentiment. Both affect respondents’ assessment of past changes in their financial position. Conform the peak-end rule, their answers relate more to extreme detrimental monthly changes than to yearly aggregate changes in key financial and macro variables. These effects are stronger when particular variables are more salient. The evidence for irrational herding consists in the answers of second-round respondents being too strongly related to future expectations of first-round respondents. These effects persist when we account for structural differences in sample composition or for the effect of other predictive variables. These biases are hence present outside controlled environments and can explain the relevance of sentiment indexes.

Keywords: Consumer sentiment; cognitive biases; peak-end rule; herding; feedback loops (search for similar items in EconPapers)
JEL-codes: E32 E71 G41 (search for similar items in EconPapers)
Date: 2019-05-01, Revised 2023-03-21
New Economics Papers: this item is included in nep-cbe and nep-mac
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