When people encounter new information about a topic, they should update their beliefs accordingly. However, many either underreact or overreact, with responses varying based on environmental factors. Researchers at Carnegie Mellon University, Lehigh University, and the London School of Economics compared how people make inferences and revise beliefs when presented with identical information.

The study, published in Econometrica, analyzed two belief-updating scenarios: inference problems (observing signals about an underlying state) and forecast-revision problems (observing the same signals but updating beliefs about future outcomes).

The key finding: participants underreacted to signals when inferring about underlying states, but overreacted to the same signals when revising forecasts about future outcomes — a phenomenon the researchers termed the inference-forecast gap.

Yucheng Liang, Assistant Professor of Accounting at Carnegie Mellon’s Tepper School of Business, noted: “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.”

Tony Q. Fan, Assistant Professor of Economics at Lehigh University, explained: “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.”

Journal: Econometrica
DOI: 10.3982/ECTA23334
Article Title: The Inference-Forecast Gap in Belief Updating
Publication Date: 30-Jul-2026

Source: EurekAlert