Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Faculty & Research
  • Faculty
  • Research
  • Featured Topics
  • Academic Units
  • …→
  • Harvard Business School→
  • Faculty & Research→
Publications
Publications
  • 2022
  • Working Paper

Overreaction and Diagnostic Expectations in Macroeconomics

By: Pedro Bordalo, Nicola Gennaioli and Andrei Shleifer
  • Format:Electronic
  • | Language:English
ShareBar

Abstract

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 offers a unified view of a great deal of data.

Keywords

Overreaction; Rational Expectations; Macroeconomics; Market Participation; Social Psychology

Citation

Bordalo, Pedro, Nicola Gennaioli, and Andrei Shleifer. "Overreaction and Diagnostic Expectations in Macroeconomics." NBER Working Paper Series, No. 30356, August 2022.
  • Read Now

About The Author

Andrei Shleifer

Negotiation, Organizations & Markets
→More Publications

More from the Authors

    • 2022
    • Faculty Research

    Imagining the Future: Memory, Simulation and Beliefs about COVID

    By: Pedro Bordalo, Giovanni Burro, Katherine B. Coffman, Nicola Gennaioli and Andrei Shleifer
    • April 2022
    • Journal of Finance

    Predictable Financial Crises

    By: Robin Greenwood, Samuel G. Hanson, Andrei Shleifer and Jakob Ahm Sørensen
    • September 2021
    • Journal of Financial Economics

    Diagnostic Bubbles

    By: Pedro Bordalo, Nicola Gennaioli, Spencer Yongwook Kwon and Andrei Shleifer
More from the Authors
  • Imagining the Future: Memory, Simulation and Beliefs about COVID By: Pedro Bordalo, Giovanni Burro, Katherine B. Coffman, Nicola Gennaioli and Andrei Shleifer
  • Predictable Financial Crises By: Robin Greenwood, Samuel G. Hanson, Andrei Shleifer and Jakob Ahm Sørensen
  • Diagnostic Bubbles By: Pedro Bordalo, Nicola Gennaioli, Spencer Yongwook Kwon and Andrei Shleifer
ǁ
Campus Map
Harvard Business School
Soldiers Field
Boston, MA 02163
→Map & Directions
→More Contact Information
  • Make a Gift
  • Site Map
  • Jobs
  • Harvard University
  • Trademarks
  • Policies
  • Accessibility
  • Digital Accessibility
Copyright © President & Fellows of Harvard College