This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

« Back to Results

Expectations, Learning, and Household Choices

Paper Session

Saturday, Jan. 6, 2018 2:30 PM - 4:30 PM

Marriott Philadelphia Downtown, Meeting Room 404
Hosted By: American Economic Association
  • Chair: Camelia M. Kuhnen, University of North Carolina-Chapel Hill

Socioeconomic Status and Macroeconomic Expectations

Sreyoshi Das
,
University of Michigan
Camelia M. Kuhnen
,
University of North Carolina-Chapel Hill
Stefan Nagel
,
University of Michigan

Abstract

We show that individuals' macroeconomic expectations are influenced by their socioeconomic status (SES). People with higher income or higher education are more optimistic about future macroeconomic developments, including business conditions, the national unemployment rate, and stock market returns. The spread in beliefs between high- and low-SES individuals diminishes significantly during recessions. A comparison with professional forecasters and historical data reveals that the beliefs wedge reflects excessive pessimism on the part of low-SES individuals. SES-driven expectations help explain why higher-SES individuals are more inclined to invest in the stock market and more likely to consider purchasing homes, durable goods, or cars.

Labor Market Search Without Rational Expectations

Laura Pilossoph
,
Federal Reserve Bank of New York
Matthew Wiswall
,
University of Wisconsin-Madison
Basit Zafar
,
Federal Reserve Bank of New York

Abstract

This paper uses new and rich panel data on individuals' labor market expectations and realizations. We study the correlates of labor market expectations (labor market status; earnings; offers; reservation wages), and investigate whether expectations are predictive of actual outcomes. The panel aspect of the data -- combined with data on expectations and future outcomes -- allows us to study how individuals update their labor market beliefs in response to unanticipated shocks. We find that: (1) expectations vary in meaningful ways, and tend to be predictive of actual outcomes, and (2) individuals update their beliefs about future labor market offers and reservation wages in a way inconsistent with Bayesian updating. The updating of beliefs is found to be asymmetric, with individuals' responsiveness to positive unanticipated shocks being much larger than that to negative ones. We embed the empirical evidence that we document on expectations and learning into a model of search on and off the job with learning. Because individuals are too optimistic, reservation wages are too high and individuals are in lower wage jobs than if learning were rational, resulting in significant welfare losses.

House Price Expectations and Leverage Choice: Empirical Evidence

Michael C. Bailey
,
Facebook
Theresa Kuchler
,
New York University
Johannes Stroebel
,
New York University
Arlene Wong
,
Princeton University

Abstract

To what extend do friendship links affect the adoption of new products? We first combine social network data with individual choices on the adoption of the newly introduced Google Pixel phone to estimate the effects of friends’ adoption of a new product on individual purchasing decisions. We use the exclusive introduction of the Pixel by Verizon combined with differences in Verizon market share across the US to instrument for friends’ initial adoption of the phone. Next, we analyze the role of county level connections on the adoption of a wide variety of products in stores across US counties. Counties that are more connected socially adopt new products at similar times. We explore whether consumers in more socially connected counties have access to a more new products and a wider variety of products and the implications of such consumption externalities on consumer welfare.

Inflation Experiences and Contract Choice – Evidence From Residential Mortgages

Matthew J. Botsch
,
Bowdoin College
Ulrike Malmendier
,
University of California-Berkeley

Abstract

We show that personal lifetime experiences of inflation significantly affect the valuation of fixed- versus variable-rate financial instruments. The experience-effect hypothesis predicts that individuals who have experienced higher inflation expect nominal interest rates to increase more. Hence, if borrowing, they demand greater protection against increases in nominal interest rates. In the context of mortgage financing, we analyze how borrowers choose between fixed-rate and adjustable-rate options. We estimate that every additional percentage point of experienced inflation increases a borrower’s willingness to pay for a fixed-rate mortgage by 6 to 21 basis points of the FRM contract rate, as compared to an adjustable rate mortgage. This experience effect has a major impact on the product mix of FRMs versus ARMs: nearly one in six households would switch to an ARM if not for the impact of inflation experiences. Simulations of counterfactual mortgage payments suggest that households who would otherwise have switched pay approximately $8,000 in year-2000, after-tax dollars for the embedded inflation protection of the FRM over their expected tenure in the house, implying significant welfare consequences.
Discussant(s)
Francesco D'Acunto
,
University of Maryland
Ashwini Agrawal
,
London School of Economics and Political Science
Geoffrey Tate
,
University of North Carolina-Chapel Hill
Andreas Fuster
,
Federal Reserve Bank of New York
JEL Classifications
  • D1 - Household Behavior and Family Economics
  • D8 - Information, Knowledge, and Uncertainty