Biased expectations

Edda Claus, Viet Hoang Nguyenc

    Research output: Contribution to journalArticle


    We propose two novel measures of the cognitive bias of over-optimism, ex ante optimism and ex post optimism, using a quarterly consumer expectations survey. We demonstrate the micro-foundations of the proposed measures and show empirically that excessive consumer optimism about future family finances impacts the real economy. Ex ante, excessive optimism compels consumers to save less and borrow more, putting upward pressure on consumption growth. Ex post, when family finances improve persistently less than expected, consumers cut back on credit and save more which puts downward pressure on consumption growth. This saving and borrowing channel of the optimism bias is robust to consumer age.
    Original languageEnglish
    JournalEuropean Economic Review
    Publication statusPublished - 2023


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