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Wishful Thinking in Macroeconomic Expectations

Author

Listed:
  • King King Li

    (Shenzhen University)

  • Bo Huang

    (Chinese University of Hong Kong)

Abstract

We conduct an online survey experiment to investigate determinants of macroeconomic expectations. We investigate the effect of probability overweighting, religiosity, ambiguity aversion, and time preference. We find that subjects exhibiting probability overweighting, having higher degree of religiosity, having lower discount factor are more optimistic on economic growth and income, while ambiguity averse subjects are more pessimistic about the impact of Covid-19 outbreak on the economic growth rate. We compute the forecast errors and estimate the proportion of forecasts with rounding and implausible values. We find that significant proportion of subjects have rather poor understanding on macroeconomic variables. Subjects with higher degree of religiosity, living in small towns and villages, and with higher subjective socioeconomic status have higher forecast errors, while subjects with better education have lower forecast errors. Overall, we find that subjects form optimistic expectations, supporting the implication of belief-based utility (Brunnermeier and Parker, 2005) and wishful thinking (Seybert and Bloomfield, 2009) on macroeconomic expectations.

Suggested Citation

  • King King Li & Bo Huang, 2021. "Wishful Thinking in Macroeconomic Expectations," GRU Working Paper Series GRU_2021_015, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    • Handle: RePEc:cth:wpaper:gru_2021_015
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    File URL: https://www.cb.cityu.edu.hk/ef/doc/GRU/WPS/GRU%232021-015%20Li.pdf
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    Cited by:

    1. Viana, Jr., Dante Baiardo C. & Lourenço, Isabel & Black, Ervin L. & Martins, Orleans Silva, 2023. "Macroeconomic instability, institutions, and earnings management: An analysis in developed and emerging market countries," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 51(C).

    More about this item

    Keywords

    Macroeconomic Expectations; Belief-based Utility; Probability Overweighting; Ambiguity Aversion; Time Preference; Religiosity; Experiment;
    All these keywords.

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy

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