Belief Updating: Inference versus Forecast Revision; Liang Yucheng (Carnegie Mellon University)

Abstract

Individual forecasts of macroeconomic and financial variables show widespread overreaction to news, but laboratory experiments on belief updating typically find underinference from signals. We provide new experimental evidence to connect these two seemingly inconsistent phenomena. Building on a classic experimental paradigm, we study how people make inferences and revise forecasts in the same information environment. Subjects underreact to signals when inferring about underlying states, but overreact to signals when revising forecasts about future outcomes. This gap in belief updating is driven the use of different heuristics in these two tasks. Additional treatments link our results to the difficulty of recognizing the conceptual connection between making inferences and revising forecasts.