Evidence on expectations of household finances

João F. Cocco, Francisco Gomes and Paula Lopes

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We use panel data on expected and realized changes in household finances to study the process of expectation formation. Households extrapolate from improvements in financial situation, but deteriorations are associated with an increased dispersion of forecasts, and higher probabilities of both negative and positive forecast errors. Individuals who expect earnings declines to revert too quickly save less and are more likely to be financially worse off again in the future. Learning from past errors reduces the likelihood that individuals are optimistic following a deterioration in their finances. The evidence shows how experiences, learning, and life events matter for expectation formation.

Keywords: household finance; household expectations; expectation errors; learning; life events (search for similar items in EconPapers)
JEL-codes: D84 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2025-03-25
New Economics Papers: this item is included in nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in Management Science, 25, March, 2025. ISSN: 0025-1909

Downloads: (external link)
http://eprints.lse.ac.uk/125547/ Open access version. (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:125547

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().