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Extrapolative Uncertainty and Household Economic Behavior

Author

Listed:
  • Elyas Fermand

    (Finance Department, Leavey School of Business, Santa Clara University, Santa Clara, California 95053)

  • Camelia M. Kuhnen

    (Finance Department, Kenan-Flagler Business School, University of North Carolina at Chapel Hill, Chapel Hill, North Carolina 27599; National Bureau of Economic Research, Cambridge, Massachusetts 02138)

  • Geng Li

    (Division of Research and Statistics, Federal Reserve Board, Washington, District of Columbia 20551)

  • Itzhak Ben-David

    (National Bureau of Economic Research, Cambridge, Massachusetts 02138; Finance Department, Fisher College of Business, The Ohio State University, Columbus, Ohio 43210)

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.

Suggested Citation

  • Elyas Fermand & Camelia M. Kuhnen & Geng Li & Itzhak Ben-David, 2024. "Extrapolative Uncertainty and Household Economic Behavior," Management Science, INFORMS, vol. 70(8), pages 5607-5625, August.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:8:p:5607-5625
    DOI: 10.1287/mnsc.2023.00820
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