Overreaction and Working Memory

Hassan Afrouzi, Spencer Yongwook Kwon, Augustin Landier, Yueran Ma and David Thesmar

No 27947, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study how biases in expectations vary across different settings, through a large-scale randomized experiment where participants forecast stable random processes. The experiment allows us to control the data generating process and the participants’ relevant information sets, so we can cleanly measure forecast biases. We find that forecasts display significant overreaction to the most recent observation. Moreover, overreaction is especially pronounced for less persistent processes and longer forecast horizons. We also find that commonly-used expectations models do not easily account for the variation in overreaction across settings. We provide a theory of expectations formation with imperfect utilization of past information. Our model closely fits the empirical findings.

JEL-codes: C91 D03 D83 D84 (search for similar items in EconPapers)
Date: 2020-10
New Economics Papers: this item is included in nep-exp, nep-hrm and nep-neu
Note: CF
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Citations: View citations in EconPapers (10)

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