Rational Expectations or Heuristics?

Based on recent work that suggests that voters in proportional representation (PR) systems have incentives to cast strategic votes, the authors hypothesize that levels of strategic voting are similar in both first-past-the-post (FPTP) and PR systems. Comparing vote intentions in majoritarian elections in the United States, Mexico, Britain, and Israel to PR elections in Israel and the Netherlands, the authors find that a substantial proportion of the voters desert their most preferred candidate or party and that patterns of strategic voting across FPTP and PR bear striking similarities. In every election, smaller parties tend to lose votes to major parties. Because there tend to be more small parties in PR systems, tactical voting is actually more common under PR than under FPTP. The findings suggest that whatever the electoral system, voters focus on the policy consequences of their behavior and which parties are likely to influence policy outcomes following the election.

Japan's new electoral system may or may not be good for Japanese democracy, but it is almost ideally designed for the study of strategic voting. No other existing electoral system provides political scientists with data on such neatly separated but simultaneous single-member districts (SMD) and proportional representation (PR) votes. Using candidate-level aggregate data, I find strong evidence for strategic voting: Candidates with a good chance of winning receive more SMD than PR votes, and those with little chance of winning receive more PR votes. Strategic voting explains not only the basic pattern but also several exceptions to the rule. In addition, I find that a realistic but relatively inaccurate ex ante prediction of a candidate's probability of victory produces a superior explanatory model than does a perfect ex post prediction calculated from the final electoral results. These results support the hypothesis that voters base their strategic voting calculations on simple cues available to them before the election.

We introduce incomplete information to a multiparty election under proportional representation: each voter knows her preferences and votes strategically to maximize her payoffs, but is uncertain about the number and the preferences of the other voters. Parties are assumed to be purely office motivated and, hence, the resulting governments are always minimum winning. In this framework, we prove (a) generic existence of equilibria where only two parties receive a positive fraction of the votes and therefore lead to single-party governments and (b) generic inexistence of equilibria that lead to coalition governments. That is, contrary to common wisdom, a proportional rule is found not to promote sincere voting and to be favorable towards single-party governments. The existence of two-party equilibria that lead to single-party governments is robust to parties having ideological concerns.

Forecasts of economic variables is very important for planning and policy making purposes. Forecasts is an important input in decision making processes because obtaining reliable forecasts of some relevant macroeconomic variables is necessary for efficient management of funds, time and resources.Business has always recognised the need for a view of the future and has used explicit forecasts in the design and execution of their economic andJor business policies. For example, a firm trying to decide upon its investment programme will have to take into account not only the current known set of circumstances but also the unknown economic and business conditions in the future. The firm has to form a view about the future, such as the likely sales, costs, prices, competitors' reactions, labour requirements, government regulations and so on. These views about the future values of economic variables are frequently referred to as 'expectations', that is, what the firm expects to happen in the future.In recent years the performances of many microeconomics and macroeconomics series have been erratic. For example, rate of inflation, price of crude oil, prices of primary commodities, rate of interest and other pertinent economic variables have been fluctuating widely and have caused concern among the public, politicians, economists and also the businessmen. According to Mayes (l 981), with such non-uniformity of economic variables observed in the last two decades, the role of expectations has become more relevant in the economic agents' decision making process. Mayes (1981) further states that under the present conditions it has become more important to consider what expectations actually are and how they are formed.The value of economic forecasts of certain macroeconomic variables can be derived from several methods. The three main methods for deriving economic forecasts are (i) time series, (ii) econometric models, and (iii) survey of intentions of concerned agents and organizations. Time seriesanalysis and econometric modeling are the two most widely used methods in economic forecasting, but Holden and Peel (1983) had noted their drawbacks. Recently, economists have turned their direction of interest in evaluating the rationality of economic forecasts from surveys of market participants. The empirical literature on the direct tests of the rational expectations hypothesis is vast and growing. Holden et al. (1985), Lovell (1986), Wallis (1989), Maddala (1991) and Pesaran (1991) had reviewed some of these studies. The aim was to determine whether survey data on economic forecasts are accurate in the Muth's (1961) sense, that is, whether participating economic agents used all available information at the time forecasts are made. in other words, the rational expectations hypothesis of the economic forecast was put to test. In general, the empirical studies do not support the rational expectations hypothesis.Most of the studies carried out to evaluate the rationality of business firms' forecasts of economic variables were conducted on developed nations. Madsen (1993) studies the formation of output expectations in manufacturing industry in Japan, Denmark, Finland, France, Germany, Netherlands, Norway, Sweden and the United Kingdom. He found that the rational expectations hypothesis was weakly rejected. Williams (1988) and Chazelas (1988) found investment forecasts biased predictors of the actual investment value for firms in the United Kingdom and France. Meganck et a!. (1988) have concluded that investment forecasts of the manufacturing firm in Belgium were unbiased predictors of the actual values. However. Daub (1982) failed to find any rationality of the Canadian capital investment intention survey data. On the other hand. a study by Leonard (1982) on employment forecasts by the United States services sectors found that the forecasts were biased and the rationality of these employment forecasts rejected.The purpose of this paper is to present some empirical evidence on the rationality of agricultural firm managers' expectations using survey data. This study is important because it adds to the current literature on the testing of rationality of survey data, in particular, it provides empirical evidence from the perspective of a developing country. As for the country under study, the finding of the study could establish whether the forecasts documented by such survey are accurate or not; and if not, ways to produce more accurate forecasts must be found. 'Rationality' in this paper means that managers in agricultural firms have unbiased expectations and efficiently utilised available information at the time the forecasts are made.

Although tactical voting attracts a great deal of attention, it is very hard to measure as it requires knowledge of both individuals’ voting choices as well as their unobserved preferences. In this article, we present a simple empirical strategy to nonparametrically identify tactical voting patterns directly from balloting results. This approach allows us to study the magnitude and direction of strategic voting as well as to verify which information voters and parties take into account to determine marginal constituencies. We show that tactical voting played a significant role in the 2010 election, mainly for Liberal–Democratic voters supporting Labour. Moreover, our results suggest that voters seem to form their expectations based on a national swing in vote shares rather than newspaper guides published in the main media outlets or previous election outcomes. We also present some evidence that suggests that campaign spending is not driving tactical voting.

The article considers the specifics of conducting election campaigns in majority, mixed and proportional electoral systems. It is substantiated that the type of electoral system determines the nature of the election campaign and allows to determine the main types of electoral technologies used to win. Concepts such as "electoral system", "majority electoral system", "proportional electoral system", "mixed electoral system", "political brand", "party brand" have been studied. The focus is on the fact that the notion of elections is not limited to the act of voting, it is a much broader notion that takes place within an election campaign, the nature of which is determined by the type of electoral system already exercised. It is focused on the fact that in the majority electoral system it is important to focus on building a brand of politics, and in the proportional electoral system – the brand of the party. It is determined that all election campaigns, depending on the type of electoral system, were radically different from all previous election campaigns conducted in Ukraine: new channels of communication, new election technologies and means of manipulation. However, despite the availability of media technology, politicians continue to use outdated manipulative technologies. It is substantiated that the pro-government political force chooses one or another type of electoral system, given the possibility of obtaining the largest number of votes. Electoral technologies such as "administrative resource", "double" and "election grids" have been studied. It is shown that the process of virtualization has formed not only new forms of organization of public communication and analytics in politics, but also led to a radical change in the organization and conduct of elections. It is shown that there are universal electoral technologies that are used in any electoral system. It is concluded that media technologies are becoming more important today during election campaigns.

The Brexit cleavage continued to define politics in the 2019 general election. This posed a challenge for parties and voters on each side of the debate: how to coordinate in favour of their side in each seat. In this note, I examine the extent to which party (electoral pacts) and voter (tactical voting) coordination affected the outcome of the 2019 general election. On the voter side, I find that tactical voting was only slightly more prevalent than in previous election cycles. On the party side, I find that neither the Unite to Remain pact nor the Brexit Party’s withdrawal of candidates against incumbent Conservatives noticeably affected the results. Holding the structure of preferences in 2019 constant, Labour would probably have won a handful of additional seats in England and Wales (three on average but only one clear gain) by joining the Unite to Remain pact. The effect of the pact is limited because Labour successfully won over many Remain supporters from the other parties during the campaign. This meant that voters of the other Remain parties were only modestly more likely to prefer Labour over the Conservatives by the end of the campaign, and the pool of minor party voters was generally small in Labour’s target seats. The Liberal Democrats would have received around eight additional seats if Labour had joined the pact (again holding preferences constant).

Numerous studies investigate how personality traits and individual characteristics influence vote choice. However, the effect of risk attitudes on the proclivity to cast a strategic vote has not been tested yet. This article tests whether the likelihood of defecting from one’s preferred party is influenced by attitudes towards risk. I argue that the utility stemming from expressing a preference by opting for the favored party is a sure thing, whereas the utility stemming from an instrumental choice depends on some probabilities, and consequently that strategic voting is riskier than sincere voting. Using survey data from the United Kingdom and Canada, I find that risk-averse voters are less likely to vote strategically than risk-acceptant ones.

Political elites are generally reluctant to alter the status quo unless a change will benefit them. Scholars have found that institutions, and the rules governing them, tend to evolve in ways that maintain equilibrium, preserving the status of winners. Are voters—when presented the opportunity—more likely than elites to alter political institutions? Using survey data, the authors explore mass support in the American states for changing how legislative districts are drawn. They find evidence that representational losers at statewide and district levels are more likely to vote for reforms to create nonpartisan redistricting in ballot issue contests, while electoral winners oppose reform. They argue that ordinary voters—like elected officials—may exhibit a similar instrumental rationale, using a self-interested calculus when serving as policy makers for a day. Beyond theorizing about conditions under which the mass public might engage in strategic voting, the analysis has implications for practical election reform efforts in the American states.

A rapidly-growing literature on rational expectation modeling and testing is found in agricultural economics. The reviewed studies do not offer a consensus regarding the verification or falsification of the rational expectation hypothesis in agricultural markets. Small sample sizes and the low power of statistical tests in the presence of alternative expectation hypotheses contribute to the variability in conclusions. An additional and confounding source of the variability is specification searching. With a wide variability in specifications, divergent results are to be expected. Despite the lack of consensus, rational expectations modeling and testing has improved our knowledge of both expectation formation in agricultural markets, and the processes of agricultural market equilibrium and price determination.

We revisit predictability of forecast errors in macroeconomic survey data, which is often taken as evidence of behavioral biases at odds with rational expectations. We argue that to reject rational expectations, one must be able to predict forecast errors out of sample. However, the regressions used in the literature often perform poorly out of sample. The models seem unstable and could not have helped to improve forecasts with access only to available information. We do find some notable exceptions to this finding, in particular mean bias in interest rate forecasts, that survive our out-of-sample tests. Our findings help narrow down the set of biases that merit closer attention of researchers in behavioral macroeconomics.

The chapter presents the cutting-edge approaches to economic expectations that originate in the field of computational intelligence. First, AI-based expectation concepts are situated within the long-standing debate about expectation formation in economics. They are discussed as a middle way between naïve and rational expectations and a subcategory of boundedly rational beliefs. Second, two approaches to formalize AI-based expectations (including their advantages and disadvantages) are presented in detail; one is based on Deep Reinforcement Learning and the other applies Recurrent Neural Networks. Finally, the theoretical and practical implications of AI-based expectation concepts are discussed.

Are Dynamic Stochastic Disequilibrium models Keynesian or neoclassical?

Asymmetric expectation effects of regime shifts in monetary policy

ABSTRACTThe goal of this paper is to investigate forecast heterogeneity and time variability in the formation of expectations using disaggregated monthly survey data on macroeconomic indicators provided by Bloomberg from June 1998 to August 2017. We show that our panel of forecasters are not rational and are moderately heterogeneous and thus confirm that previously well-established results on asset prices hold for macroeconomic indicators. We propose a flexible hybrid forecast model defined at any time as a combination of the extrapolative, regressive, adaptive and interactive heuristics. Controlling for endogenous structural breaks, we find that experts adjust their forecast behaviour at any time with some inertia in extrapolative and adaptive profiles. Changes in the formation of expectations are triggered mostly by financial shocks, and uncertainty is dealt with by using complex processes in which the fundamentalist component overweighs chartist activity. Forecasters whose models combine different relevant rules and display high temporal flexibility provide the most accurate forecasts. Authorities can then stabilize the domestic markets by encouraging fundamentalists’ forecasts through increased transparency policy.