Extrapolative Uncertainty and Household Economic Behavior

Elyas Fermand (), Camelia Kuhnen, Geng Li and Itzhak Ben-David
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Elyas Fermand: Finance Department, Leavey School of Business, Santa Clara University, Santa Clara, California 95053

Management Science, 2024, vol. 70, issue 8, 5607-5625

Abstract: We examine the uncertainty in households’ expectations regarding macroeconomic outcomes, namely inflation and the rate of nationwide home price growth. We document that people extrapolate from the instability of their personal and local environment when assessing the future volatility of these macroeconomic variables. Consequently, there are within-person spillovers in subjective uncertainty regarding different economic outcomes. This extrapolative behavior is more pronounced among lower-numeracy individuals, and it persists throughout the business cycle. People with more uncertain macroeconomic expectations are more likely to engage in precautionary behaviors regarding consumption and equity market exposure and are more concerned about credit market access.

Keywords: household finance; expectations; extrapolation; uncertainty (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:8:p:5607-5625

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