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"The Coherence Side of Rationality : Rules of thumb, narrow bracketing, and managerial incoherence in corporate forecasts"
joint with Stefano Rossi (Bocconi).

ABSTRACT : We present theory and evidence on the coherence of multidimensional forecasts by firms. In our normative model, internal forecasts of output and inputs coherently incorporate the technology and budget relationships linking those variables. In our positive model, incoherence may arise from ’narrow thinking’---intra-personal frictions in coordinating forecasts across variables---via the use of suboptimal forecasting heuristics. We use our theory to evaluate the rules of thumb managerial textbooks propose to help firms make internal forecasts, to develop tests of forecast coherence, and to distinguish coherence from accuracy. Our theory yields a partial ranking of rules of thumb and testable predictions linking forecast incoherence, rule-of-thumb use, and firm performance. Using the Duke Survey of top US executives, we find : (i) heterogeneous use of rules ; (ii) negative associations of firm performance with forecast incoherence and with use of suboptimal rules ; (iii) about one-half of CFOs making incoherent output-input growth forecasts.