Overreaction and diagnostic expectations in macroeconomics
We present the case for the centrality of overreaction in expectations for addressing important challenges in finance and macroeconomics. First, non-rational expectations by market participants can be measured and modeled in ways that address some of the key challenges posed by the rational expectat...
| Main Authors: | , , |
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| Format: | Journal article |
| Language: | English |
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American Economic Association
2022
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| _version_ | 1826314356021788672 |
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| author | Bordalo, P Gennaioli, N Shleifer, A |
| author_facet | Bordalo, P Gennaioli, N Shleifer, A |
| author_sort | Bordalo, P |
| collection | OXFORD |
| description | We present the case for the centrality of overreaction in expectations for addressing important challenges in finance and macroeconomics. First, non-rational expectations by market participants can be measured and modeled in ways that address some of the key challenges posed by the rational expectations revolution, most importantly the idea that economic agents are forward-looking. Second, belief overreaction can account for many long-standing empirical puzzles in macro and finance, which emphasize the extreme volatility and boom-bust dynamics of key time series, such as stock prices, credit, and investment. Third, overreaction relies on psychology and is disciplined by survey data on expectations. This suggests that relaxing the assumption of rational expectations is a promising strategy, helps theory and evidence go together, and promises a unified view of a great deal of data. |
| first_indexed | 2024-09-25T04:32:48Z |
| format | Journal article |
| id | oxford-uuid:031dabd4-373b-4937-9814-6fb34ff32d01 |
| institution | University of Oxford |
| language | English |
| last_indexed | 2024-09-25T04:32:48Z |
| publishDate | 2022 |
| publisher | American Economic Association |
| record_format | dspace |
| spelling | oxford-uuid:031dabd4-373b-4937-9814-6fb34ff32d012024-09-05T16:23:19ZOverreaction and diagnostic expectations in macroeconomicsJournal articlehttp://purl.org/coar/resource_type/c_dcae04bcuuid:031dabd4-373b-4937-9814-6fb34ff32d01EnglishSymplectic ElementsAmerican Economic Association2022Bordalo, PGennaioli, NShleifer, AWe present the case for the centrality of overreaction in expectations for addressing important challenges in finance and macroeconomics. First, non-rational expectations by market participants can be measured and modeled in ways that address some of the key challenges posed by the rational expectations revolution, most importantly the idea that economic agents are forward-looking. Second, belief overreaction can account for many long-standing empirical puzzles in macro and finance, which emphasize the extreme volatility and boom-bust dynamics of key time series, such as stock prices, credit, and investment. Third, overreaction relies on psychology and is disciplined by survey data on expectations. This suggests that relaxing the assumption of rational expectations is a promising strategy, helps theory and evidence go together, and promises a unified view of a great deal of data. |
| spellingShingle | Bordalo, P Gennaioli, N Shleifer, A Overreaction and diagnostic expectations in macroeconomics |
| title | Overreaction and diagnostic expectations in macroeconomics |
| title_full | Overreaction and diagnostic expectations in macroeconomics |
| title_fullStr | Overreaction and diagnostic expectations in macroeconomics |
| title_full_unstemmed | Overreaction and diagnostic expectations in macroeconomics |
| title_short | Overreaction and diagnostic expectations in macroeconomics |
| title_sort | overreaction and diagnostic expectations in macroeconomics |
| work_keys_str_mv | AT bordalop overreactionanddiagnosticexpectationsinmacroeconomics AT gennaiolin overreactionanddiagnosticexpectationsinmacroeconomics AT shleifera overreactionanddiagnosticexpectationsinmacroeconomics |