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On the nature of expectations
Author(s) -
Harvey Nigel,
Bolger Fergus,
McClelland Alastair
Publication year - 1994
Publication title -
british journal of psychology
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.536
H-Index - 92
eISSN - 2044-8295
pISSN - 0007-1269
DOI - 10.1111/j.2044-8295.1994.tb02519.x
Subject(s) - overconfidence effect , series (stratigraphy) , extrapolation , econometrics , consensus forecast , rational expectations , adaptive expectations , psychology , conditional expectation , scoring rule , statistics , economics , mathematics , social psychology , paleontology , biology
We review economic and psychological models of expectation formation. According to the rational model, expectations are optimal; according to the adaptive model, they minimize previous error; according to the extrapolative model, they continue a trend. In an experiment, we asked subjects to make forecasts from previous data in the same series or from previous data in a different but related series. We also asked them to estimate the probability that their forecasts would be correct. The rational model failed because within‐series forecasts were too poor, cross‐series forecasts were biased, and probability estimates showed overconfidence. Regression analyses and a lack of performance improvement showed that the adaptive model was inappropriate. Instead, within‐series forecasts were made by extrapolation and cross‐series forecasts appeared to be based on a faulty conditional rule.