DP12898 Forecaster (Mis-)Behavior

Author(s): Tobias Broer, Alexandre Kohlhas
Publication Date: April 2018
Keyword(s): bounded rationality, Forecaster behavior, Rational Expectations
JEL(s): C53, D83, D84
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12898

Professional forecasts are often used to gauge the expectations of households and firms. Recently, the average of such forecasts have been argued to support rational expectation formation with noisy private information. We document that individual forecasts of US GDP and inflation in the Survey of Professional Forecasters overrespond to both private and public information, contradicting, prima facie, the assumption of noisy rational expectation formation. We generalize two alternative models of forecaster behavior that focus on strategic diversification and behavioral overconfidence, respectively, to dynamic environments with noisy private information. We find that both models predict overresponses, but only the overconfidence model is simultaneously consistent with a substantial overreaction to public information.