An experimental study of the nature of consumer expectations

Abstract

Although important both theoretically and practically, the nature of consumer economicexpectation formation has been little studied, particularly by psychologists. The mostrelevant previous research suggests that expectations are based on a heuristic that resultsin them being significantly biased. Further, relevant indicator series are poorly utilized.However, this earlier research used a task lacking in potentially important features of thereal world, and this may have impaired performance. In the current experiment,participants received a more ecologically-valid task. Although there was still evidence ofheuristic use, leading to suboptimal performance and bias, this performance wassignificantly better than anticipated from previous research, particularly regarding use ofindicator series. However, when a strong trend in the criterion series allowed accurateforecasting without consideration of indicators, they were little used. I conclude thatexpectations are formed by first extrapolating the criterion series and only if that workspoorly is other relevant information considered. Thus consumers appear to trade-offaccuracy against effort, such that more effort is expended only when some threshold ofacceptable performance fails to be reached.