The Macroeconomic Theory of Natural Expectations

Summer 2011

The goal of this project was to run a laboratory experiment testing the macroeconomic theory of natural expectations, or the theory that people’s forecasts place too much weight on recent changes rather than take into account all available information perfectly. More specifically, we designed our experiment to test the idea that, when predicting future outcomes in a random series that has short-run momentum but long-run mean reversion, people tend to over-estimate the persistence of the momentum and fail to adequately anticipate the long-run mean reversion.

  • Sponsoring Faculty Member: David Laibson
  • Undergraduate Research Scholar: Christina Zou