Nonadditivity of Subjective Expectations over Different Time Intervals

Abstract

We examine the additivity of expectations over different time intervals. For example, when asked about 10-year stock price growth, survey respondents report an expected change that is not equal to, but closer to zero than, the sum of their expectations over two shorter time intervals that cover the same 10 years. Such subadditivity, which we also find in expectations for other economic variables, is irrational, as it cannot stem from aggregating short-term expectations. Model estimates show that the pattern is consistent with a time perception where shorter time intervals have a proportionally larger weight. We also find that the respondents’ degree of additivity is correlated with making larger financial investments.