Modelling Expectations

Expectations play a key role in economic models of decision-making under uncertainty. The benchmark approach of assuming that individuals form expectations by accurately processing all available information and updating their beliefs accordingly, however, has found little support in the data. Recent work has therefore turned to empirical measures of expectations to inform modelling assumptions that deviate from the rational expectations benchmark.

Theresa Kuchler (joint with Basit Zafar in "Expectation Formation") has contributed to this research effort by empirically analysing how personal experiences affect expectations about aggregate economic outcomes in housing and labour markets, and as such provide guidance on modelling the expectation-formation process. The study exploits cross-sectional and time series variation in differences in locally experienced house prices to show that respondents systematically extrapolate from personally experienced home prices when asked for their expectations about US house price development. In addition, higher volatility of locally experienced house prices causes respondents to report a wider distribution over expected future national house price movements. The authors find similar results for labour market expectations, where they exploit within-individual variation in labour market status to estimate the effect of own experience on national labour market expectations. Personally experiencing unemployment leads respondents to be significantly more pessimistic about future nationwide unemployment. Extrapolation from personal experiences is more pronounced for less sophisticated individuals for both housing and unemployment expectations. The results provide empirical evidence to inform the modelling of expectations.

Theresa Kuchler joined New York University Stern School of Business as an Assistant Professor in July 2013. In addition to her work on expectation formation, her research interests lie in how consumers make decisions in financial and related areas, incorporating insights from behavioural economics. She earned a PhD in Economics at Stanford University. Prior to attending Stanford, she received a diploma in Business Economics from the University of Mannheim and spent a year as a Fulbright visiting student in the Economics Department at the University of California at Berkeley.