IQ, Expectations, and Choice

Francesco D’Acunto, Daniel Hoang, Maritta Paloviita and Michael Weber

The Review of Economic Studies, 2023, vol. 90, issue 5, 2292-2325

Abstract: We use administrative and survey-based micro data to study the relationship between cognitive abilities (IQ), the formation of inflation expectations, and the consumption plans of a representative male population. High-IQ men display 50 lower forecast errors for inflation than other men. High-IQ men, but not others, have consistent inflation expectations and perceptions over time. In terms of choice, only high-IQ men increase their consumption propensity when expecting higher inflation as the consumer Euler equation prescribes. Education levels, income, other expectations, and socio-economic status, although important, do not explain the variation in expectations and choice by IQ. Recent modelling attempts to incorporate boundedly rational agents into macro models do not fully capture all the facts we document. We discuss which dimensions of expectations formation and choice are important for heterogeneous-agents models of household consumption and for the transmission of fiscal and monetary policy.

Keywords: Behavioural macroeconomics; Heterogeneous beliefs; Limited cognition; Expectations formation; Household finance (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (5)

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Related works:
Working Paper: IQ, Expectations, and Choice (2019)
Working Paper: IQ, Expectations, and Choice (2019)
Working Paper: IQ, expectations, and choice (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:90:y:2023:i:5:p:2292-2325.

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