Heuristic modeling of expectation formation in a complex experimental information environment

Becker, Otwin; Leitner, Johannes; Leopold‐Wildburger, Ulrike

doi:10.1016/j.ejor.2005.09.003

“…In the early 1960's Becker conducted a prediction experiment using this time series without a break over 42 periods. Recently Becker et al (2007Becker et al ( , 2008 presented a simple heuristic based on Becker's (1967) forecasting program for the modeling of average forecasts of the subjects for the same class of time series. The authors showed that the model forecasts the behavior of the subjects better than the Rational Expectations Hypothesis (REH) when indicators are in the information set of the participants.…”

Section: Introductionmentioning

confidence: 99%

“…whether all assumptions of the theory are applied, and the difficulty of the task. Dwyer et al (1993) found the individual forecasts to be in line with a random walk with drift model, whereas Becker et al (2007) found no support for rationality in an experiment with several additional time series in the information set.…”

Section: Introductionmentioning

confidence: 99%

Expectation formation and regime switches

Becker

¹

,

Leitner

²

,

Leopold‐Wildburger

³

2009

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“…We implement a forecasting task that is built on the experimental design by Becker et al (2007). Additionally we introduce incentives for coordination, extending the basic setting, which primarily encourages accurate predictions.…”

Section: Experimental Design and Proceduresmentioning

confidence: 99%

Strategic Coordination in Forecasting. An Experimental Study

Bizer

¹

,

Meub

²

,

Proeger

³

et al. 2014

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. poor performances of prediction markets as resulting from the distinct incentives that forecasters face. While this notion has been considered theoretically and empirically, the underlying behavioral working mechanisms have not yet been described. We thus put forth an exploratory experiment on the emergence and robustness of coordination in a forecasting setting implementing contradictory incentives for accurate forecasts and coordination. Terms of use: Documents inForecasts are shown to be inaccurate and biased toward current values. This in turn has subjects aiming at coordination benefits. Predominantly, coordination is achieved through the risk-dominant equilibrium as the game proceeds. Once established, coordination is fairly stable and adds to overall welfare. Our results support the assumption of rational herding as a driving force for predictions of poor accuracy that are systematically biased towards focal points.

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“…For examples of time series forecasting experiments, see e.g. Bolger and Harvey (1993); Lawrence and O'Connor (1995); Becker et al (2005Becker et al ( , 2007Becker et al ( , 2009 ;Leitner und Schmidt (2006); Reimers and Harvey (2011). Regarding incentives for accurate predictions, Tversky and Kahnemann (1974), Wilson et al (1996) and Epley and Gilovich (2005) offer prizes as rewards for the most accurate, unbiased estimations but find only minor effects of such an incentive. Chapman and Johnson (2002) summarize these findings, concluding that "incentives reduce anchoring very little if at all" (p.125).…”

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confidence: 99%

Anchoring: A Valid Explanation for Biased Forecasts When Rational Predictions are Easily Accessible and Well Incentivized?

Meub

¹

,

Proeger

²

2013

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: Behavioral biases in forecasting, particularly the lack of adjustment from current values and the overall clustering of forecasts, are increasingly explained as resulting from the anchoring heuristic. Nonetheless, the classical anchoring experiments presented in support of this interpretation lack external validity for economic domains, particularly monetary incentives, feedback for learning effects and a rational strategy of unbiased predictions. We introduce an experimental design that implements central aspects of forecasting to close the gap between empirical studies on forecasting quality and the laboratory evidence for anchoring effects. Comprising more than 5,000 individual forecasts by 455 participants, our study shows significant anchoring effects. Without monetary incentives, the share of rational predictions drops from 42% to 15% in the anchor's presence. Monetary incentives reduce the average bias to one-third of its original value. Additionally, the average anchor bias is doubled when task complexity is increased, and is quadrupled when the underlying risk is increased. The variance of forecasts is significantly reduced by the anchor once risk or cognitive load is increased. Subjects with higher cognitive abilities are on average less biased toward the anchor when task complexity is high. The anchoring bias in our repeated game is not influenced by learning effects, although feedback is provided. Our results support the assumption that biased forecasts and their specific variance can be ascribed to anchoring effects. Terms of use: Documents in

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Heuristic modeling of expectation formation in a complex experimental information environment

Cited by 15 publications

References 13 publications

Expectation formation and regime switches

Expectation formation and regime switches

Strategic Coordination in Forecasting. An Experimental Study

Anchoring: A Valid Explanation for Biased Forecasts When Rational Predictions are Easily Accessible and Well Incentivized?

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