Modeling Expectation Formation Involving Several Sources of Information

Otwin Becker, Johannes Leitner and Ulrike Leopold‐Wildburger

German Economic Review, 2008, vol. 9, issue 1, 96-112

Abstract: Abstract. Experimental studies of expectation formation of subjects are predominantly limited to the prediction of one single time series despite the practical relevance of expectations in situations with multiple sources of information. In this paper, we report on an experiment in which subjects are given time series (indicators) as additional information for the judgemental forecast of a stationary time series. The quality and the number of these indicators are varied in three versions of a forecasting experiment. We explore the effects on forecasting accuracy and we test the average forecasts of the subjects for consistency with the rational expectations hypothesis. A simple heuristic is presented that explains the average forecasting behavior better than the rational expectations if indicators are presented to the subjects. It is demonstrated by a simulation study that this result is representative for the considered stationary stochastic processes.

Date: 2008
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German Economic Review is currently edited by Bernhard Felderer, Joseph F. Francois, Ivo Welch, Urs Schweizer and David E. Wildasin

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