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Forecaster (Mis-)Behavior

Alexandre Kohlhas and Tobias Broer
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Alexandre Kohlhas: Institute for International Economic Studies, Stockholm University
Tobias Broer: Stockholm University

No 1171, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We document how professional forecasts overrespond to new information. We show that such overresponses are inconsistent with rational expectation formation with noisy information, common agency-based models of forecaster behavior, as well as several behavioral alternatives. In place, we propose a simple model of absolute and relative overconfidence, consistent with the stylized facts. Unlike rational forecasters, overconfident forecasters are overoptimistic about the precision of their private information and believe it to be superior to that held by others. We show how this causes forecasters to misinterpret the information content of market-generated public outcomes. Consequently, forecasters not only overrespond to private information but also to observed public news. We document how the latter is a pervasive feature of the forecast data. Last, we use the model to shed light on the importance of misperceptions about public information for expectation formation.

New Economics Papers: this item is included in nep-cbe
Date: 2019
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