Diagnostic Expectations and Inventory Dynamics
Time: 14:00
Venue: Zijingang Campus
Speaker: LUO Yulei
Category: Talk & Lecture
Speaker: Yulei Luo
Venue: Room 530, Chengjun Building 7, Zijingang Campus
Abstract: Using firm-level data, we document that inventory investment rises with contemporaneous sales shocks and falls with lagged sales shocks. This reversal pattern is inconsistent with standard rational-expectations stock-adjustment models, which imply weak or counterfactual inventory-sales comovement. We show that a simple extension with diagnostic expectations accounts for these dynamics. In the model, managers overweight representative demand signals, generating closed-form policy rules under which inventories initially overreact to sales shocks and subsequently reverse. Quantitatively, the model matches key moments of inventory dynamics, including the sign of inventory-sales comovement, the relative volatility of inventory investment to sales, and the persistence of inventory dynamics. These results identify belief distortions as a central force in inventory adjustment and provide a behavioral explanation for both longstanding and new puzzles in inventory dynamics.
