This article has been reviewed according to Science X's editorial process and policies. Editors have highlighted the following attributes while ensuring the content's credibility: When people hear something new about a topic, they should update their beliefs to reflect the new information. But many people either underreact or overreact, with their responses varying based on different factors, including the environment.
In "The Inference-Forecast Gap in Belief Updating," researchers compared how people make inferences and revise their beliefs in light of the same information. The study, published in Econometrica, was conducted by researchers at Carnegie Mellon University, Lehigh University and the London School of Economics and Political Science (LSE). "Economists have long used notions of underreaction and overreaction to explain puzzles in macroeconomics and finance, but have never reached consensus on why people underreact in some environments and overreact in others," notes Yucheng Liang, assistant professor of accounting at Carnegie Mellon's Tepper School of Business, who coauthored the study.
Liang and his co-authors analyzed two commonly studied problems related to updating beliefs: Participants underreacted to signals when making inferences about underlying states but overreacted to the same signals when revising forecasts about future outcomes—a phenomenon the authors call the inference-forecast gap. This gap was largely driven by different rules of thumb used in the two tasks, the study found, and may help explain the coexistence of underreaction and overreaction across settings. "Our findings suggest that this discrepancy may arise because people consider some problems inference tasks and others forecast-revision tasks, leading them to approach the two in fundamentally different ways," explains Tony Q.
Fan, assistant professor of economics at Lehigh University's College of Business, who led the study. "This implies that to understand biased reactions to information in the field, it is essential to first understand how people mentally represent the belief-updating problem they face." "Our work is related to an active body of experimental research that seeks to understand the conditions of underreaction and overreaction in updating beliefs," adds Cameron Peng, assistant professor of finance at LSE, who coauthored the study. "We show that the direction of belief-updating biases depends on the type of belief elicited and the nature of the question, and by connecting the inference-forecast gap to the use of different simplifying rules of thumb, we highlight the role of complexity and incorrect mental models in explaining belief-updating biases." Tony Q.
Fan et al, The Inference‐Forecast Gap in Belief Updating, Econometrica (2026). DOI: 10.3982/ecta23334 BSc Life Sciences & Ecology. Microbiology lab background with pharmaceutical news experience in oil, gas, and renewable industries.
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