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Field
Abstract
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Before
In this project, we study expectations formation in an experimental setting, using simple and stable statistical process. Based on these data, we estimate an empirical model that builds on the recent literature on expectation formation, which nests rational expectations, but also allows for extrapolation and under-reaction. We document large and stable deviations from rationality. We also find that both extrapolation and under-reaction are statistically discernible in the data, but extrapolation quantitatively dominates. We perform these tests in large and diverse populations.
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After
In this project, we study expectations formation in an experimental setting, using simple and stable statistical process. We perform these tests in large and diverse populations. We document significant and stable deviations from rationality, in the direction of overreaction. Furthermore, the degree of overreaction is stronger when the process is more transitory. We also find that commonly used models of expectations do not seem to account for the key patterns in the data. We design additional tests to investigate the underlying mechanism.
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