Biased Inference due to Prior Beliefs: Evidence from the Field

Martin Kapons and Peter Kelly

Journal of Political Economy Microeconomics, 2026, vol. 4, issue 2, 620 - 655

Abstract: Prior beliefs influence what is foremost in our memories and therefore what is representative. This can result in biased interpretations of information signals. We provide evidence of this prior-biased inference in the earnings forecasts of sell-side analysts and the macroeconomic forecasts of professional forecasters. By accounting for this bias in our analysis of forecasts, we are better able to predict future asset prices and macroeconomic outcomes.

Date: 2026
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