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Economic versus psychological forecasting. Evidence from consumer confidence surveys

  • Bovi, Maurizio

Permanent and widespread psychological biases affect both the subjective probability of future economic events and their retrospective interpretation. They may give rise to a systematic gap between (over-critical) judgments and (over-optimistic) expectations - the "forecast" error. When things go bad, then, psychology suggests that people tend to become particularly bullish, amplifying the forecast error. Also, psychology argues that personal/future conditions are systematically perceived to be better than the aggregate/past ones. All this sharply contrasts with standard economic assumptions. Evidence from a unique dataset covering 10 European countries over 22Â years confirms the presence of structural psychologically driven distortions in people's judgments and expectations formation.

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Article provided by Elsevier in its journal Journal of Economic Psychology.

Volume (Year): 30 (2009)
Issue (Month): 4 (August)
Pages: 563-574

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Handle: RePEc:eee:joepsy:v:30:y:2009:i:4:p:563-574
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