2024 European Winter Meeting, Palma de Majorca, Spain: December, 2024
The Coherence Side of Rationality: Theory and evidence from firm plans
Pamela Giustinelli
We study the forecasting heuristics MBA textbooks propose to make firms' plans. Using Duke-Survey data, we document the prevalence and heterogeneity of heuristics use among top US executives. We propose a theory of optimal multidimensional forecasting; evaluate heuristics in terms of forecast coherence; develop tests to distinguish coherence from accuracy. In our normative benchmark, technology parameters coherently link output-inputs forecasts. Our positive model rationalizes some heuristics as second-best responses to noisy signals, yielding a pecking order
of heuristics. Consistent with our predictions, firm performance is negatively associated with incoherence and incoherent heuristics use. About one-half of CFOs make incoherent forecasts.
of heuristics. Consistent with our predictions, firm performance is negatively associated with incoherence and incoherent heuristics use. About one-half of CFOs make incoherent forecasts.
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