Inflation expectations and behavior Armantier, Olivier; De Bruin, Wändi Bruine; Topa, Giorgio ...
International economic review (Philadelphia),
20/May , Letnik:
56, Številka:
2
Journal Article
Recenzirano
Odprti dostop
We compare the inflation expectations reported by consumers in a survey with their behavior in a financially incentivized investment experiment. The survey is found to be informative in the sense ...that the beliefs reported by the respondents are correlated with their choices in the experiment. More importantly, we find evidence that most respondents act on their inflation expectations showing patterns consistent with economic theory. Respondents whose behavior cannot be rationalized tend to have lower education and lower numeracy and financial literacy. These findings help confirm the relevance of inflation expectations surveys and provide support to the microfoundations of modern macroeconomic models.
We develop a model of reference-dependent preferences and loss aversion where "gain-loss utility" is derived from standard "consumption utility" and the reference point is determined endogenously by ...the economic environment. We assume that a person's reference point is her rational expectations held in the recent past about outcomes, which are determined in a personal equilibrium by the requirement that they must be consistent with optimal behavior given expectations. In deterministic environments, choices maximize consumption utility, but gain-loss utility influences behavior when there is uncertainty. Applying the model to consumer behavior, we show that willingness to pay for a good is increasing in the expected probability of purchase and in the expected prices conditional on purchase. In within-day labor-supply decisions, a worker is less likely to continue work if income earned thus far is unexpectedly high, but more likely to show up as well as continue work if expected income is high.
The Safe Operating Space (SOS) of a recreational fishery is the multidimensional region defined by levels of harvest, angler effort, habitat, predation and other factors in which the fishery is ...sustainable into the future. SOS boundaries exhibit trade‐offs such that decreases in harvest can compensate to some degree for losses of habitat, increases in predation and increasing value of fishing time to anglers. Conversely, high levels of harvest can be sustained if habitat is intact, predation is low, and value of fishing effort is moderate. The SOS approach recognizes limits in several dimensions: at overly high levels of harvest, habitat loss, predation, or value of fishing effort, the stock falls to a low equilibrium biomass. Recreational fisheries managers can influence harvest and perhaps predation, but they must cope with trends that are beyond their control such as changes in climate, loss of aquatic habitat or social factors that affect the value of fishing effort for anglers. The SOS illustrates opportunities to manage harvest or predation to maintain quality fisheries in the presence of trends in climate, social preferences or other factors that are not manageable.
A crucial challenge for economists is figuring out how people interpret the world and form expectations that will likely influence their economic activity. Inflation, asset prices, exchange rates, ...investment, and consumption are just some of the economic variables that are largely explained by expectations. Here George Evans and Seppo Honkapohja bring new explanatory power to a variety of expectation formation models by focusing on the learning factor. Whereas the rational expectations paradigm offers the prevailing method to determining expectations, it assumes very theoretical knowledge on the part of economic actors. Evans and Honkapohja contribute to a growing body of research positing that households and firms learn by making forecasts using observed data, updating their forecast rules over time in response to errors. This book is the first systematic development of the new statistical learning approach.
Depending on the particular economic structure, the economy may converge to a standard rational-expectations or a "rational bubble" solution, or exhibit persistent learning dynamics. The learning approach also provides tools to assess the importance of new models with expectational indeterminacy, in which expectations are an independent cause of macroeconomic fluctuations. Moreover, learning dynamics provide a theory for the evolution of expectations and selection between alternative equilibria, with implications for business cycles, asset price volatility, and policy. This book provides an authoritative treatment of this emerging field, developing the analytical techniques in detail and using them to synthesize and extend existing research.
ABSTRACT
When a group of investors with dispersed private information jointly invest in a risky project, how should they divide the project's profit? We show that a simple contract dividing profits ...in proportion to investors' risk tolerances may facilitate information aggregation by altering investors' risk‐taking incentives when they decide on how investment strategies respond to private information. Our results provide a contracting‐based approach for information aggregation, which is an alternative to learning from endogenous market variables (e.g., prices) via contingent schedules as seen in well‐known rational expectations equilibrium models.
A buying firm might in the future incur costs associated with a supplier’s carbon dioxide emissions, safety violations, or other social or environmental impacts. Learning about a supplier’s impacts ...requires costly effort, but it is necessary (and sometimes sufficient) to reduce those impacts. The capital market valuation of a buying firm reflects investors’ estimate of future costs associated with a supplier’s impacts, as well as any costs that the buying firm incurs in order to learn about and reduce a supplier’s impacts. This paper analyzes a game theoretic model in which a manager—with the objective of maximizing the capital market valuation of the buying firm—decides whether to learn about a supplier’s impacts, how much cost to incur to reduce the supplier’s impacts, and whether to disclose the supplier’s impacts to investors. The investors have rational expectations (e.g., that a manager might withhold bad news about the supplier’s impacts) and value the buying firm accordingly. The paper considers a mandate to disclose information learned about a supplier’s impacts. The paper shows that the disclosure mandate deters learning and thus, under plausible conditions, results in higher expected impacts. The disclosure mandate can result in lower expected impacts only if buying firms face moderately high future costs associated with suppliers’ impacts. In contrast, a disclosure mandate always increases a buying firm’s expected discounted profit and capital market valuation. A disclosure mandate can induce cooperation among buying firms with a shared supplier, yet result in higher expected impacts by the supplier. When a buying firm has alternative suppliers, the disclosure mandate favors commitment to a supplier to facilitate learning about that supplier’s impacts (instead of searching for a lower-impact supplier).
This paper was accepted by Serguei Netessine, operations management.
Recent models of reference-dependent preferences indicate that expectations may play a prominent role in the presence of behavioral anomalies. A subset of such expectations-based models predicts an ...“endowment effect for risk”: that risk attitudes differ when reference points change from certain to stochastic. In two purposefully simple risk preference experiments, eliminating often-discussed confounds, I demonstrate both between and within subjects such an endowment effect for risk. These results provide needed separation between expectations-based reference-dependent models, allow for evaluation of recent theoretical extensions, and may help to close a long-standing debate in decision science on inconsistency between utility elicitation methodologies.
We introduce diagnostic expectations into a standard setting of price formation in which investors learn about the fundamental value of an asset and trade it. We study the interaction of diagnostic ...expectations with learning from prices and speculation (buying for resale). With diagnostic (but not with rational) expectations, these mechanisms lead to price paths exhibiting three phases: initial underreaction, then overshooting (the bubble), and finally a crash. With learning from prices, the model generates price extrapolation as a by-product of beliefs about fundamentals, lasting only as the bubble builds up. When investors speculate, even mild diagnostic distortions generate substantial bubbles.
Starting from the assumption that decision situations in economic contexts are characterized by fundamental uncertainty, this article argues that the decision-making of intentionally rational actors ...is anchored in fictions. "Fictionality" in economic action is the inhabitation in the mind of an imagined future state of the world and the beliefs in causal mechanisms leading to this future state. Actors are motivated in their actions by the imagined future and organize their activities based on these mental representations. Since these representations are not confined to empirical reality, fictional expectations are also a source of creativity in the economy. Fictionality opens up a way to an understanding of the microfoundations of the dynamics of the economy. The article develops the notion of fictional expectations. It discusses the role of fictional expectations for the dynamics of the economy and addresses the question of how fictional expectations motivate action. The last part relates the notion of fiction to calculation and social macrostructures, especially institutions and cultural frames. The conclusion hints at the research program developing from the concept of fictional expectations.
PDF
