Template-Type: ReDIF-Paper 1.0
Title: Overconfidence in Private Information Explains Biases in Professional Forecasts
Author-Name: Klaus Adam
Author-Email: adam@uni-mannheim.de
Author-Name: Pei Kuang
Author-Email: p.kuang@bham.ac.uk
Author-Name: Shihan Xie
Author-Email: shihanx@illinois.edu

Classification-JEL: C53, D83, D84, E31
Keywords: expectations, information, belief updating, professional forecasts

Abstract: We observe a rich set of public information signals available to participants in the Survey
of Professional Forecasters (SPF) and decompose individual forecast revisions into those
due to public information and a remainder due to residual information. We find that SPF
forecasters overreact to residual information at almost all forecast horizons and for almost all
forecast variables. In addition, forecasts are overly anchored to prior beliefs for all variables
at all forecast horizons. We show analytically that overconfidence in private information
qualitatively generates both of these features. It also implies that forecast errors correlate
positively with past forecast revisions at the consensus level, but negatively at the individual
level, as documented previously in the literature. Estimating Bayesian updating models on
SPF data, we show that overconfidence in private information also replicates the observed
patterns quantitatively. All estimated models display strong and statistically significant
overconfidence in private information.

Note: 
Length: 60
Creation-Date: 2025-01
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp617
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2025_617