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Cognitive Biases and Consumer Sentiment

Author

Listed:
  • Erik Kole

    (Erasmus University Rotterdam)

  • Liesbeth Noordegraaf-Eelens

    (Erasmus University Rotterdam)

  • Bas Vringer

    (Erasmus University Rotterdam)

Abstract

We show that two heuristics, the peak-end rule and herding, generate biases in indexes of consumer sentiment. Both affect respondents’ assessment of past changes in their financial position. Conform the peak-end rule, their answers relate more to extreme detrimental monthly changes than to yearly aggregate changes in key financial and macro variables. These effects are stronger when particular variables are more salient. The evidence for irrational herding consists in the answers of second-round respondents being too strongly related to future expectations of first-round respondents. These effects persist when we account for structural differences in sample composition or for the effect of other predictive variables. These biases are hence present outside controlled environments and can explain the relevance of sentiment indexes.

Suggested Citation

  • Erik Kole & Liesbeth Noordegraaf-Eelens & Bas Vringer, 2019. "Cognitive Biases and Consumer Sentiment," Tinbergen Institute Discussion Papers 19-031/I, Tinbergen Institute, revised 21 Mar 2023.
    • Handle: RePEc:tin:wpaper:20190031
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    File URL: https://papers.tinbergen.nl/19031.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Consumer sentiment; cognitive biases; peak-end rule; herding; feedback loops;
    All these keywords.

    JEL classification:

    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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