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Cognitive biases in consumer sentiment: the peak-end rule and herding

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Listed:
  • Erik Kole

    (Erasmus University Rotterdam
    Tinbergen Institute)

  • Liesbeth Noordegraaf-Eelens

    (Erasmus University Rotterdam
    Codarts University of Performing Arts)

  • Bas Vringer

Abstract

We show that two heuristics, the peak-end rule and herding, generate biases in indexes of consumer sentiment. Both affect respondents’ assessment of changes in their financial position over the past year. Conform the peak-end rule, their answers relate more to extreme detrimental monthly than to yearly changes in key financial and macro-variables. These effects are stronger for more salient variables. As for herding, we document that respondents interviewed in the second round about past financial changes rely too strongly on future expectations from first-round respondents. These effects persist when we account for structural differences in sample composition or for the effect of other predictive variables. Our research shows the presence of both biases outside controlled environments and sheds new light on the relevance of sentiment indexes.

Suggested Citation

  • Erik Kole & Liesbeth Noordegraaf-Eelens & Bas Vringer, 2025. "Cognitive biases in consumer sentiment: the peak-end rule and herding," Empirical Economics, Springer, vol. 69(4), pages 2141-2211, October.
    • Handle: RePEc:spr:empeco:v:69:y:2025:i:4:d:10.1007_s00181-025-02797-y
    DOI: 10.1007/s00181-025-02797-y
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    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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