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Expectation Formation

Basit Zafar and Theresa Kuchler
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Theresa Kuchler: NYU Stern School of Business

No 678, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: We use novel survey panel data to estimate how personal experiences affect expectations about aggregate economic outcomes in housing and labor markets. We exploit cross-sectional and time series variation in differences in locally experienced house prices to show that respondents systematically extrapolate from personally experienced home prices when asked for their expectations about US house price development. In addition, higher volatility of locally experienced house prices causes respondents to report a wider distribution over expected future national house price movements. We find similar results for labor market expectations, where we exploit within-individual variation in labor market status to estimate the effect of own experience on national labor market expectations. Personally experiencing unemployment leads respondents to be significantly more pessimistic about future nationwide unemployment. Extrapolation from personal experiences is more pronounced for less sophisticated individuals for both housing and unemployment expectations.

Date: 2015
New Economics Papers: this item is included in nep-mac and nep-ure
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