Anchoring bias in consensus forecasts and its effect on market prices

Previous empirical studies that test for the "rationality" of economic and financial forecasts generally test for generic properties such as bias or autocorrelated errors, and provide limited insight into the behavior behind inefficient forecasts. In this paper we test for a specific behavioral bias -- the anchoring bias described by Tversky and Kahneman (1974). In particular, we examine whether expert consensus forecasts of monthly economic releases from Money Market Services surveys from 1990-2006 have a tendency to be systematically biased toward the value of previous months' data releases. We find broad-based and significant evidence for the anchoring hypothesis; consensus forecasts are biased towards the values of previous months' data releases, which in some cases results in sizable predictable forecast errors. Then, to investigate whether the market participants anticipate the bias, we examine the response of interest rates to economic news. We find that bond yields react only to the residual, or unpredictable, component of the surprise and not to the expected piece of the forecast error apparently induced by anchoring. This suggests market participants anticipate the anchoring bias embedded in expert forecasts.