Biased expectations

Edda Claus and Viet Hoang Nguyen

European Economic Review, 2023, vol. 154, issue C

Abstract: We propose two novel measures of the cognitive bias of over-optimism, ex ante optimism and ex post optimism, using a quarterly consumer expectations survey. We demonstrate the micro-foundations of the proposed measures and show empirically that excessive consumer optimism about future family finances impacts the real economy. Ex ante, excessive optimism compels consumers to save less and borrow more, putting upward pressure on consumption growth. Ex post, when family finances improve persistently less than expected, consumers cut back on credit and save more which puts downward pressure on consumption growth. This saving and borrowing channel of the optimism bias is robust to consumer age.

Keywords: Cognitive bias; Consumption; Saving; Borrowing; Expectations surveys (search for similar items in EconPapers)
JEL-codes: D12 D14 D84 E71 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:154:y:2023:i:c:s0014292123000533

DOI: 10.1016/j.euroecorev.2023.104424

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