Economic versus psychological forecasting. Evidence from consumer confidence surveys

Permanent and widespread psychological biases affect both the subjective probability of future economic events and their retrospective interpretation. They may give rise to a systematic gap between (over-critical) judgments and (over-optimistic) expectations – the “forecast” error. When things go bad, then, psychology suggests that people tend to become particularly bullish, amplifying the forecast error. Also, psychology argues that personal/future conditions are systematically perceived to be better than the aggregate/past ones. All this sharply contrasts with standard economic assumptions. Evidence from a unique dataset covering 10 European countries over 22 years confirms the presence of structural psychologically driven distortions in people’s judgments and expectations formation.