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Seminar with João Cocco (London Business School)

Wednesday, 12/18/2019
Campus de Gualtar | EEG - Room 0.04, 13h15
Evidence on expectations of household finances
We use a long panel with information on expected and realized changes in individual finances to study the process of expectation formation and expectation errors, controlling for individual fixed effects. We find that, following improvements in financial situation, individuals tend to form extrapolative expectations and are excessively optimistic about the future. However, following a deterioration in financial situation, there is an increase in the dispersion of forecasts: individuals increase both their subjective probability of a future deterioration (consistent with extrapolative behavior) and the probability of a future improvement (mean- reversion). We show that when individuals expect mean-
reversion, they are too optimistic about the future. They reduce their savings and increase their borrowing, and they are more likely to find themselves financially worse off again in subsequent periods.
Núcleo de Investigação em Políticas Económicas e Empresariais (NIPE)
Escola de Economia e Gestão (EEG)
Universidade do Minho
Campus de Gualtar, 4710-057 Braga
Tel.: +351 253604518