Evidence on Expectations of Household Finances

João F. Cocco (), Francisco Gomes () and Paula Lopes ()
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João F. Cocco: London Business School, London NW1 4SA, United Kingdom; and CEPR, London EC1V 0DX, United Kingdom
Francisco Gomes: London Business School, London NW1 4SA, United Kingdom; and CEPR, London EC1V 0DX, United Kingdom
Paula Lopes: London School of Economics, London WC2A 2AE, United Kingdom; and Netspar, 5037 AB Tilburg, Netherlands

Management Science, 2025, vol. 71, issue 11, 9548-9568

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)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:11:p:9548-9568

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