Economic and Psychological Theories of Forecast Bias and Learning: Evidence from U.S. Business Managers' Forecasts

Michael Anderson and Arthur Goldsmith
Additional contact information
Michael Anderson: Washington & Lee University
Arthur Goldsmith: Washington & Lee University

Eastern Economic Journal, 1994, vol. 20, issue 4, 413-427

Abstract: Economists and psychologists have each puzzled over the nature of decision making and the formation of expectations. Mainstream economists currently base their theory of expectation formation on the assumption of rationality Rationality implies unbiased forecasts and learning from past mistakes. Psychologists, however, see people as guided by processes other than the assumption of rationality. These processes often result in biased predictions and a failure to learn from past mistakes. This paper uses Conference Board data to examine the forecasts of business managers for evidence of bias and learning. Our analysis reveals systematically biased decision making by business executes in nearly every industry studied. The managers in the sample proved to be overly optimistic. In addition we find evidence of the learning that economists predict. However, this learning is of little consequence to the accuracy of managerial forecasts. These outcomes are analyzed using both the economics and cognitive psychology literature.

Keywords: Expectation; Forecast; Forecasts; Learning; Prediction; Rationality (search for similar items in EconPapers)
JEL-codes: C53 D83 D84 (search for similar items in EconPapers)
Date: 1994
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://web.holycross.edu/RePEc/eej/Archive/Volume20/V20N4P413_427.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eej:eeconj:v:20:y:1994:i:4:p:413-427

Access Statistics for this article

Eastern Economic Journal is currently edited by Cynthia A. Bansak, St. Lawrence University and Allan A. Zebedee, Clarkson University

More articles in Eastern Economic Journal from Eastern Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Victor Matheson, College of the Holy Cross ().