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Tim Jaeger, Universtaet Hamburg; Lisa Posey, Pennsylvania State University; Petra Steinorth, University of Hamburg
We conduct an experiment in which individuals forecast an autoregressive time series that occasionally includes extreme price changes. Overall, we find that extreme price changes decrease forecasting accuracy. Depending on the process, we see an increase of absolute forecasting errors up to 30%. Adding occasional extreme price changes specifically biases estimates upwards, i.e. subjects systematically overestimate outcomes. In addition, we observe that large price changes increase extrapolative biases, i.e. individuals overweight the deviation of current round's realization from last round's rational expectation.
