Outcome feedback reduces over-forecasting of inflation and overconfidence in forecasts

Abstract

Survey respondents over-forecast inflation: they expect it to be higher than it turns out to be. Furthermore, people are generally overconfident in their forecasts. In two experiments, we show that providing outcome feedback that informs people of the actual level of the inflation that they have forecast reduces both over-forecasting and overconfidence in forecasts. These improvements were preserved even after feedback had been withdrawn, a finding that indicates that they were not produced because feedback had a temporary incentive effect but because it had a more permanent learning effect. However, providing forecasters with more outcome feedback did not have a greater effect. Feedback appears to provide people with information about biases in their judgments and, once they have received that information, no additional advantage is obtained by giving it to them again. Reducing over-forecasting also had no clear effect on overall error. This was because providing outcome feedback after every judgment also affected the noise or random error in forecasts, increasing it by a sufficient amount to cancel out the benefits provided by the reduction in over-forecasting.