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Journal Article

Do Corporate Executives Have Rational Expectations?

David I. Levine
The Journal of Business
Vol. 66, No. 2 (Apr., 1993), pp. 271-293
Stable URL: http://www.jstor.org/stable/2353313
Page Count: 23
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Do Corporate Executives Have Rational Expectations?
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Abstract

This article presents tests of rational expectations using the Profit Impact of Market Strategy survey of executives of large corporations. Unlike past surveys, the respondents have a financial interest in being accurate. Executives do not have rational expectations concerning output prices, input prices, wages, or product demand. For example, executives predicting price increases 5% above the average of other companies had actual price increases only about 0.5% above the mean. Executives' expectations also give too much weight to their own recent experience and do not use all available information. Expectations are difficult to predict; nevertheless, simple adaptive models do almost as well as more complicated specifications.

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