Abstract
I analyze new data on subjective probabilistic expectations on house prices collected in the Spanish Survey of Household Finances. Households are asked to distribute ten points among five different scenarios for the change in the price of their homes over the next 12 months. This paper is the first empirical study to document the beliefs of a representative sample of households about the future value of their homes. It also reviews the methodology of expectation measurement and recent work on household subjective probabilities. I model individual subjective probability densities using splines, construct quantiles from those densities, and analyze how the heterogeneity in the individual distributions relates to differences in housing and household characteristics. An important result of the paper is that women are more optimistic about the evolution of house prices than men. Location at the postal code level accounts for a large fraction of the variation in the subjective distributions across households. Finally, I provide some results on how subjective expectations matter for predicting spending behavior. Housing investment and car purchases are negatively associated with pessimistic expectations about future house price changes and with uncertainty about those expectations.
Highlights
This lecture is concerned with household subjective expectations
Its central theme is the analysis of new data on subjective probabilistic expectations on house prices collected in the Spanish Survey of Household Finances (EFF)
Are household expectations collected through surveys trustworthy? Do subjective household survey expectations really improve the ability to predict behavior? To help put these questions in context, I begin by reviewing basic concepts of the methodology of expectation measurement as well as recent work on the elicitation and use of household subjective expectations
Summary
This lecture is concerned with household subjective expectations. Its central theme is the analysis of new data on subjective probabilistic expectations on house prices collected in the Spanish Survey of Household Finances (EFF). The standard practice in the economics of the last century was to infer the individuals’ decision process from their observed choices Following this revealed preference analysis, both preferences and the uncertainty about the future are identified from data on choices and market outcomes alone. Assuming individuals have rational expectations as well as knowledge of the model may be needed despite that this has often not been credible In his seminal paper Manski (2004) strongly advocated for collecting self reported expectation data and using those jointly with observed choice data. The hope is this would improve economists’ credibility and ability to predict behavior. Are household expectations collected through surveys trustworthy? Do subjective household survey expectations really improve the ability to predict behavior? To help put these questions in context, I begin by reviewing basic concepts of the methodology of expectation measurement as well as recent work on the elicitation and use of household subjective expectations
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