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

Using the Duke Survey data on internal firm plans, we show that over 80% of Chief Financial Officer (CFO) forecasts align closely with simple heuristics taught in MBA textbooks. We introduce forecast coherence--internal consistency across forecasts of jointly determined variables--as a benchmark for evaluating these heuristics. Nearly half of CFOs issue forecasts closely aligned with incoherent heuristics. Such forecasts are associated with predictable reversals in forecast errors, lower firm performance, and underinvestment. We develop a parsimonious model illustrating how reliance on restricted forecasting heuristics can generate incoherence and resource misallocation within firms, consistent with our empirical evidence.