Strategic Wishful Thinking: Implications for Forecasts

The authors characterize how motivated beliefs affect forecasting behavior in the presence of strategic considerations and externalities. Their model provides a unified framework to reconcile recent evidence on the predictability of forecast errors, including under reaction of consensus forecasts and variation in under or over-reaction of individual forecasts across different economic environments. Furthermore, they show how the interaction of payoff externalities and wishful thinking can lead forecasters, who are ex-ante symmetric, to endogenously “agree to disagree” about public information: while some choose to underestimate the precision of such information, others overestimate it.