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Do Corporate Executives Have Rational Expectations?

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  • Levine, David I

Abstract

This article presents tests of rational expectations using the Profit Impact of Market Strategy survey of executives of large corporations. Unlike past surveys, the respondents have a financial interest in being accurate. Executives do not have rational expectations concerning output prices, input prices, wages, or product demand. For example, executives predicting price increases 5 percent above the average of other companies had actual price increases only about 0.5 percent above the mean. Executives' expectations also give too much weight to their own recent experience and do not use all available information. Expectations are difficult to predict; nevertheless, simple adaptive models do almost as well as more complicated specifications. Copyright 1993 by University of Chicago Press.

Suggested Citation

  • Levine, David I, 1993. "Do Corporate Executives Have Rational Expectations?," The Journal of Business, University of Chicago Press, vol. 66(2), pages 271-293, April.
    • Handle: RePEc:ucp:jnlbus:v:66:y:1993:i:2:p:271-93
    DOI: 10.1086/296604
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    Cited by:

    1. Lant, Theresa & Shapira, Zur, 2008. "Managerial reasoning about aspirations and expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 66(1), pages 60-73, April.
    2. Neumark, David & Leonard, Jonathan S, 1993. "Inflation Expectations and the Structural Shift in Aggregate Labor-Cost Determination in the 1980s," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(4), pages 786-800, November.
    3. Theresa Lant & Zur Shapira, 2009. "Managerial Reasoning about Aspirations and Expectations," Discussion Paper Series dp498, The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem.
    4. Wong, Shirly Siew-Ling & Puah, Chin-Hong & Shazali, Abu Mansor, 2011. "Survey Evidence on the Rationality of Business Expectations: Implications from the Malaysian Agricultural Sector," MPRA Paper 36661, University Library of Munich, Germany.
    5. Brea, Humberto & Grifell-Tatje, Emili & Orea, Luis, 2012. "Expectations with Unrealistic Optimism: An Empirical Application," Efficiency Series Papers 2012/01, University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG).

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