The Coherence Side of Rationality: Rules of thumb, narrow bracketing, and managerial incoherence in corporate forecasts

Pamela Giustinelli and Stefano Rossi

No 17813, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop a theory of forecast coherence in a firm production setting, which yields a normative ex ante benchmark of first-best coherent forecasts and statistical tests to detect incoherence ex post. Under the null, the forecast errors of output and inputs are "close" to one another. Using the Duke Survey of top executives of large US corporations, we reject the null of coherence for 55% of CFOs in our sample. In a positive version of our model, incoherence reflects intra-personal frictions in coordinating multiple forecasts, implying that some of the rules of thumb proposed by the managerial education literature to make contemporaneous forecasts may emerge as second-best optimal. Consistent with our model, we find that corporate performance correlates negatively with incoherence, being lowest for firms whose CFOs provide "narrow bracketing" forecasts---projecting past capital growth into the future while ignoring output and labor. We also find that the use of incoherent rules of thumb correlates negatively with corporate investment spending and positively with corporate leverage.

Keywords: Coherence; Rules of thumb; Narrow bracketing; Firm expectations (search for similar items in EconPapers)
JEL-codes: D22 D84 G32 L2 M2 (search for similar items in EconPapers)
Date: 2023-01
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP17813 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

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:cpr:ceprdp:17813

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP17813

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().