Heterogeneity in Individual Expectations, Sentiment, and Constant-Gain Learning

This paper uses adaptive learning to understand the heterogeneity of individual-level expectations. We exploit individual Survey of Professional Forecasters data on output and inflation forecasts. We endow all forecasters with the same information set that they would have as economic agents in a benchmark New Keynesian model. Forecasters are, however, allowed to differ in the constant gain values that they use to update their beliefs and in their sentiments. The latter are defined as the degrees of excess optimism or pessimism about the economy that cannot be justified by the learning model. Our results highlight the heterogeneity in the gain coefficients adopted by forecasters. The median values of the gain coefficients occasionally jump to higher values in the 1970-80s, and stabilize in the 1990s and 2000s. Individual sentiment is also persistent and heterogeneous. Differences in sentiment, however, do not simply cancel out in the aggregate: the majority of forecasters exhibit excess optimism, or excess pessimism, at the same time.