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The “Psycho-analysis” of Common People’s Forecast Errors. Evidence from European Consumer Surveys

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  • Maurizio Bovi

    (ISAE - Institute for Studies and Economic Analyses)

Abstract

Persistent and widespread psychological attitudes distort both the subjective probability of future economic events and their retrospective interpretation. It could lead to a systematic gap between (over critic) judgments and (over confident) expectations - the “survey forecast error”. When it goes bad, then, psychology suggests that people could tend to become particularly optimistic towards future evolutions. It could amplify the survey forecast error. These psychological biases are in sharp contrast with the maintained rational expectations hypothesis (REH) of most macro models. Monthly data over twenty-two years reject the REH across ten European countries, supporting the psychological view on non-Muthian expectations.

Suggested Citation

  • Maurizio Bovi, 2008. "The “Psycho-analysis” of Common People’s Forecast Errors. Evidence from European Consumer Surveys," ISAE Working Papers 95 Classification-JEL C42, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
    • Handle: RePEc:isa:wpaper:95
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    1. Balazs VARGA & Zsolt DARVAS, 2010. "Time-Varying Coefficient Methods to Measure Inflation Persistence," EcoMod2010 259600167, EcoMod.

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    Keywords

    Cognitive Psychology; Expectations; Measurement Errors; Survey Data.;
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