Luigi Butera, Copenhagen Business School
Beliefs About the Economy are Excessively Sensitive to Household-Level Shocks: Evidence from Linked Survey and Administrative Data.
Abstract:
We study how people’s beliefs about the economy covary with household-level events, utilizing a unique link between Danish administrative data and a large-scale survey of consumer expectations. We find that compared to actual inflation, people’s inflation forecasts covary much more strongly (and negatively) with both recently realized household income changes and measures of expected future household income changes. We formally establish that these findings are stark deviations from the Bayesian rational expectations benchmark. Similar results hold for perceptions of past inflation (“backcasts”), suggesting that imperfect recall is a key mechanism for biased forecasts. Building on this, a series of additional tests, some of which utilize data on adverse health events, suggests that the forecast biases are at least partly due to affect-cued recall. That is, negative (positive) household-level events cue negative (positive) recollections, which lead to pessimistic (optimistic) forecasts.
Luigi Butera is an Associate Professor at the Department of Economics at Copenhagen Business School.
His research focuses on the intersection of public economics, behavioral economics and experimental economics. I am the co-founder and director of the Institute for Behavioral Economics. He is the recipient of a 2021 DFF Sapere Aude Research Leader Starting Grant.
Luigi Butera received a B.Sc. and M.Sc. in Economics and Social Sciences at Bocconi University. He received Ph.D. training in Economics at the Interdisciplinary Center for Economic Science, George Mason University and at the Gate Lab, CNRS, and holds his Ph.D. in Economics from the University of Lyon.
You can read more about Luigi Butera here
CEBI contact: Jakob Egholt Søgaard