Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2019-05-01
Revision-Date: 2023-03-21
Number: 19-031/I
Author-Name: Erik Kole
Author-Workplace-Name: Erasmus University Rotterdam
Author-Name: Liesbeth Noordegraaf-Eelens
Author-Workplace-Name: Erasmus University Rotterdam
Author-Name: Bas Vringer
Author-Workplace-Name: Erasmus University Rotterdam
Title: Cognitive Biases and Consumer Sentiment
Abstract: We show that two heuristics, the peak-end rule and herding, generate biases in indexes of
consumer sentiment. Both affect respondents’ assessment of past changes in their financial
position. Conform the peak-end rule, their answers relate more to extreme detrimental monthly
changes than to yearly aggregate changes in key financial and macro variables. These effects are
stronger when particular variables are more salient. The evidence for irrational herding consists
in the answers of second-round respondents being too strongly related to future expectations
of first-round respondents. These effects persist when we account for structural differences
in sample composition or for the effect of other predictive variables. These biases are hence
present outside controlled environments and can explain the relevance of sentiment indexes.
Classification-JEL: E71, E32, G41
Keywords: Consumer sentiment, cognitive biases, peak-end rule, herding, feedback loops
File-URL: https://papers.tinbergen.nl/19031.pdf
File-Format: application/pdf
File-Size: 14.474.396.401 bytes
Handle: RePEc:tin:wpaper:20190031