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Keywords:

  • Quasi-rational expectations;
  • Judgemental forecasting

Abstract

The theory of quasi-rational expectations was tested under the controlled conditions of the economics laboratory. Five experiments were conducted with a variety of stochastic processes. In each experiment, subjects produced one-step-ahead forecasts of the variable generated by a Monte Carlo process. Comparisons of the performance of an aggregate of subjects' forecasts versus an ARIMA model showed that for relatively simple series (such as those generated by autoregressive processes of first or second order) the aggregate forecast was indistinguishable from that of the model. These results lend support to the theory that forecasts from an ARIMA model can serve as substitutes for aggregate expectations in macroeconomic policy models under some conditions.