Tests of rationality versus an "over optimist" bias

Rationality is usually the underlying behavioural assumption in macroeconomic models. By contrast, extensive psychological research suggests that errors in judgement are systematic rather than random, which leads to an "over optimist" bias. Using non-experimental macroeconomic data for 14 OECD countries, this paper finds that manufacturing is consistently "over optimistic" about expected production. Furthermore, in accordance with psychological models, the "over optimism" bias is found to be an increasing function of uncertainty.