DO CORPORATE-EXECUTIVES HAVE RATIONAL-EXPECTATIONS

This article presents tests of rational expectations using the Profit Impact of Market Strategy survey of executives of large corporations. Unlike past surveys, the respondents have a financial interest in being accurate. Executives do not have rational expectations concerning output prices, input prices, wages, or product demand. For example, executives predicting price increases 5% above the average of other companies had actual price increases only about 0.5% above the mean. Executives' expectations also give too much weight to their own recent experience and do not use all available information. Expectations are difficult to predict; nevertheless, simple adaptive models do almost as well as more complicated specifications.