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The Bias towards Zero in Aggregate Perceptions: An Explanation Based on Rationally Calculating Individuals

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  • Fremling, Gertrud M
  • Lott, John R, Jr

Abstract

The authors show that individuals' errors in identifying the relationships among variables cause downward biases in the aggregate that are equivalent to the public underestimating the strengths of the true relationships. They argue that rational expectations has considered only the 'misestimation' type of error, which can 'cancel out' in the aggregate, but that with errors in identifying relationships there is no similar canceling-out effect. The result is that the public appears 'irrationally' to underestimate the strength of relationships among variables even when all individual agents behave rationally. Empirical evidence that forecasts are systematically biased is reinterpreted using the authors discussion. Copyright 1996 by Oxford University Press.

Suggested Citation

  • Fremling, Gertrud M & Lott, John R, Jr, 1996. "The Bias towards Zero in Aggregate Perceptions: An Explanation Based on Rationally Calculating Individuals," Economic Inquiry, Western Economic Association International, vol. 34(2), pages 276-295, April.
    • Handle: RePEc:oup:ecinqu:v:34:y:1996:i:2:p:276-95
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    Cited by:

    1. MacKenzie, D.W., 2008. "The use of knowledge about society," Journal of Economic Behavior & Organization, Elsevier, vol. 67(3-4), pages 678-688, September.
    2. Congleton, Roger D., 2011. "Coping with unpleasant surprises in a complex world: Is rational choice possible in a world with positive information costs?," CIW Discussion Papers 6/2011, University of Münster, Center for Interdisciplinary Economics (CIW).
    3. Bryan Caplan, 2002. "Systematically Biased Beliefs About Economics: Robust Evidence of Judgemental Anomalies from the Survey of Americans and Economists on the Economy," Economic Journal, Royal Economic Society, vol. 112(479), pages 433-458, April.
    4. Congleton, Roger D, 2001. "Rational Ignorance, Rational Voter Expectations, and Public Policy: A Discrete Informational Foundation for Fiscal Illusion," Public Choice, Springer, vol. 107(1-2), pages 35-64, April.
    5. Roger Congleton, 2007. "Informational limits to democratic public policy: The jury theorem, yardstick competition, and ignorance," Public Choice, Springer, vol. 132(3), pages 333-352, September.
    6. Thomas Apolte, 2002. "Jurisdictional competition for quality standards: Competition of laxity?," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 30(4), pages 389-402, December.
    7. Bryan Caplan, 2003. "The Logic of Collective Belief," Rationality and Society, , vol. 15(2), pages 218-242, May.
    8. John Lott, 2013. "ABA ratings: what do they really measure?," Public Choice, Springer, vol. 156(1), pages 139-161, July.

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