The downside of being upbeat: Consumer cognitive biases can affect real economic activity

Edda Claus and Viet Hoang Nguyen

Melbourne Institute Working Paper Series from Melbourne Institute of Applied Economic and Social Research, The University of Melbourne

Abstract: Using a quarterly consumer expectations survey, we propose two novel measures of consumer optimism, ex ante optimism and ex post optimism. We demonstrate empirically that excessive optimism about future family finances impacts the real economy. The excessive optimism (ex ante optimism) compels consumers to save less and borrow more, putting upward pressure on consumption growth. When family finances improve persistently less than expected (ex post optimism), 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; Saving; Borrowing; Consumption; Expectations Survey Data. (search for similar items in EconPapers)
JEL-codes: D12 D14 D84 E71 (search for similar items in EconPapers)
Pages: 0pp
Date: 2020-07
New Economics Papers: this item is included in nep-mac and nep-neu
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Persistent link: https://EconPapers.repec.org/RePEc:iae:iaewps:wp2020n11

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