The Coherence Side of Rationality: Rules of thumb, narrow bracketing, and managerial incoherence in corporate forecasts

We develop a theory of forecast coherence in a firm production setting, which yields a normative ex ante benchmark of first-best coherent forecasts and statistical tests to detect incoherence ex post. Under the null, the forecast errors of output and inputs are "close" to one another. Using the Duke Survey of top executives of large US corporations, we reject the null of coherence for 55% of CFOs in our sample. In a positive version of our model, incoherence reflects intra-personal frictions in coordinating multiple forecasts, implying that some of the rules of thumb proposed by the managerial education literature to make contemporaneous forecasts may emerge as second-best optimal. Consistent with our model, we find that corporate performance correlates negatively with incoherence, being lowest for firms whose CFOs provide "narrow bracketing" forecasts---projecting past capital growth into the future while ignoring output and labor. We also find that the use of incoherent rules of thumb correlates negatively with corporate investment spending and positively with corporate leverage.