The Coherence Side of Rationality: Theory and Evidence from Firm Plans

In the Duke Survey, we document over 80% of Chief Financial Officers make own firm's forecasts closely aligned with those implied by the forecasting heuristics taught in MBA textbooks. To assess these heuristics, we develop a theory of optimal multidimensional forecasting under a coherence constraint reflecting the firm's production technology. Our theory rationalizes some heuristics as second-best responses to noisy signals, yielding a ranking of heuristics. Nearly half of CFOs make forecasts closely aligned with those implied by incoherent heuristics. Consistent with our theory's predictions, those forecasts are associated with systematic reversals in forecast errors, weaker firm performance, and underinvestment.