Do Corporate Executives Have Rational Expectations?
This article presents tests of rational expectations using the Profit Impact of Market Strategy survey of executives of large corporations. Unlike past surveys, the respondents have a financial interest in being accurate. Executives do not have rational expectations concerning output prices, input prices, wages, or product demand. For example, executives predicting price increases 5 percent above the average of other companies had actual price increases only about 0.5 percent above the mean. Executives' expectations also give too much weight to their own recent experience and do not use all available information. Expectations are difficult to predict; nevertheless, simple adaptive models do almost as well as more complicated specifications. Copyright 1993 by University of Chicago Press.
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