What Goes Up Must Come Down? Experimental Evidence on Intuitive Forecasting

John  Beshears; James J. Choi; Andreas  Fuster; David  Laibson; Brigitte C. Madrian

Article | American Economic Review: Papers and Proceedings | 2013

What Goes Up Must Come Down? Experimental Evidence on Intuitive Forecasting

by John Beshears, James J. Choi, Andreas Fuster, David Laibson and Brigitte C. Madrian

Abstract

Do laboratory subjects correctly perceive the dynamics of a mean-reverting time series? In our experiment, subjects receive historical data and make forecasts at different horizons. The time series process that we use features short-run momentum and long-run partial mean reversion. Half of the subjects see a version of this process in which the momentum and partial mean reversion unfold over 10 periods ("fast"), while the other subjects see a version with dynamics that unfold over 50 periods ("slow"). Typical subjects recognize most of the mean reversion of the fast process and none of the mean reversion of the slow process.

Keywords: Forecasting and Prediction; Cognition and Thinking;

Format: Print

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Citation:

Beshears, John, James J. Choi, Andreas Fuster, David Laibson, and Brigitte C. Madrian. "What Goes Up Must Come Down? Experimental Evidence on Intuitive Forecasting." American Economic Review: Papers and Proceedings 103, no. 3 (May 2013): 570–574.

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What Goes Up Must Come Down? Experimental Evidence on Intuitive Forecasting

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