Heuristic macroeconomic expectations

To what extent are market participants’ predictions driven by intuition and subjective judgment? A lot more than we thought, according to the data. We propose a simple heuristic to explain how forecasters form predictions and find strong support in the Survey of Professional Forecasters (SPF). At the heart of the heuristic is base-rate neglect—a well-documented psychological tendency to underweight prior beliefs in favor of salient new information. Our result suggests that this overreaction to new information affects not only point forecasts but also how forecasters perceive uncertainty. As evidence, the estimated subjective uncertainty aligns closely with the cross-sectional disagreement among forecasters, a measure of macroeconomic uncertainty.