p.17

An Experimental Study of Expectation Formation

Richard Schmalensee

Abstract

This paper reports an experimental study of expectation formation and revision in a time series context. In an adaptive expectations framework, it is shown that the speed of adjustment seems to fall in turning point periods. Expectations are considered as probability density functions, and a scoring system is devised and employed that gives subjects an incentive to report a measure of the dispersion of these functions. This measure, which is inversely related to the confidence with which expectations are held, seems to be inversely related to past forecasting performance.