Juodis, A. and Kučinskas, S. (2023). Quantifying noise in survey expectations Quantitative Economics, 14(2):609--650.
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Affiliated author
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Publication year2023
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JournalQuantitative Economics
Expectations affect economic decisions, and inaccurate expectations are costly. Expectations can be wrong due to either bias (systematic mistakes) or noise (unsystematic mistakes). We develop a framework for quantifying the level of noise in survey expectations. The method is based on the insight that theoretical models of expectation formation predict a factor structure for individual expectations. Using data from professional forecasters, we find that the magnitude of noise is large (10%{\textendash}30% of forecast MSE) and comparable to bias. We illustrate how our estimates can be applied to calibrate models with incomplete information and bound the effects of measurement error.