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

  • Maurizio Bovi

    (ISAE - Institute for Studies and Economic Analyses)

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.

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Paper provided by ISTAT - Italian National Institute of Statistics - (Rome, ITALY) in its series ISAE Working Papers with number 95 Classification-JEL C42, C53, C82, D12, D84..

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Length: 29 pages
Date of creation: Apr 2008
Date of revision:
Handle: RePEc:isa:wpaper:95
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