THE BIAS TOWARDS ZERO IN AGGREGATE PERCEPTIONS - AN EXPLANATION-BASEDON RATIONALLY CALCULATING INDIVIDUALS

We show that individuals' errors in identifying the relationships amon g variables cause downward biases in the aggregate that are equivalent to the public underestimating the strengths of the true relationships . We argue that rational expectations has considered only the ''misest imation'' type of error which can ''cancel out'' in the aggregate, but that with errors in identifying relationships, there is no similar ca ncelling-out effect. The result is that the public appears ''irrationa lly'' to underestimate the strength of relationships among variables e ven when all individual agents behave rationally. Empirical evidence t hat forecasts are systematically biased is reinterpreted using our dis cussion.