What Determines Forecasters’ Forecasting Errors?

Abstract

This paper contributes to the growing literature in macroeconomics and finance on expectation formation and information processing by analyzing the relationship between expectation formation at the individual level and the prediction macroeconomic aggregates. Using information from business tendency surveys we present a new approach of analyzing qualitative forecasting errors made by forecasters. Based on a quantal response approach with misclassification we define qualitative mispredictions of forecasters in terms of deviations from the qualitative rational expectation forecast and relate them to individual and macro factors driving these mispredictions. This enables a detailed analysis of the individual expectation formation process.