Biased Inference due to Prior Beliefs: Evidence from the Field

Prior beliefs influence what is foremost in our memories and, therefore, what is representative. This can result in biased interpretations of information signals. The authors provide evidence of this prior-biased inference in the earnings forecasts of sell-side analysts and the macroeconnmic forecasts of professional forecasters. By accounting for this bias in their analysis of forecasts, the authors are better able to predict future asset prices and macroeconomic outcomes.