Abstract
<p>Forecasting from a stream of past observations is a routine judgment task in organizations and markets, and a large literature holds that people systematically overreact when doing so, placing excessive weight on recent observations. Prominent models of expectation formation, grounded in mechanisms such as increased salience for recent signals and limited memory for past information, have predicted overreaction as a near-universal behavioral pattern, successfully capturing prior empirical findings. Here we identify boundary conditions on overreaction in expectation formation. Reanalyzing prior data in which participants viewed the full history of past realizations as a line graph, we confirm that while overreaction is most prevalent, it also varies systematically with task context, diminishing under high persistence and even reversing into underreaction as the process approaches a random walk. To test whether information display format shapes these patterns, we conducted two new experiments in which past realizations were presented sequentially, with only the most recent observation displayed (ruling out visual extrapolation). This design should, under either salience- or memory-based theories, elicit maximal overreaction. However, we find that participants instead exhibited reduced overreaction and, under high persistence, pronounced underreaction. These results establish information display format as a key moderator of forecast bias direction: reducing available history not only attenuates overreaction but can reverse its direction entirely, posing a novel challenge to prevailing theories of expectation formation.</p>