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Evidence on expectations of household finances

Author

Listed:
  • Cocco, João F.
  • Gomes, Francisco
  • Lopes, Paula

Abstract

We use panel data on expected and realized changes in household finances to study the process of expectation formation. Households extrapolate from improvements in financial situation, but deteriorations are associated with an increased dispersion of forecasts, and higher probabilities of both negative and positive forecast errors. Individuals who expect earnings declines to revert too quickly save less and are more likely to be financially worse off again in the future. Learning from past errors reduces the likelihood that individuals are optimistic following a deterioration in their finances. The evidence shows how experiences, learning, and life events matter for expectation formation.

Suggested Citation

  • Cocco, João F. & Gomes, Francisco & Lopes, Paula, 2025. "Evidence on expectations of household finances," LSE Research Online Documents on Economics 125547, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:125547
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    File URL: http://eprints.lse.ac.uk/125547/
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    More about this item

    Keywords

    household finance; household expectations; expectation errors; learning; life events;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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