The Bias towards Zero in Aggregate Perceptions: An Explanation Based on Rationally Calculating Individuals

Gertrud M Fremling and Lott, John R,

Economic Inquiry, 1996, vol. 34, issue 2, 276-95

Abstract: The authors show that individuals' errors in identifying the relationships among variables cause downward biases in the aggregate that are equivalent to the public underestimating the strengths of the true relationships. They argue that rational expectations has considered only the 'misestimation' type of error, which can 'cancel out' in the aggregate, but that with errors in identifying relationships there is no similar canceling-out effect. The result is that the public appears 'irrationally' to underestimate the strength of relationships among variables even when all individual agents behave rationally. Empirical evidence that forecasts are systematically biased is reinterpreted using the authors discussion. Copyright 1996 by Oxford University Press.

Date: 1996
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