Expectation Formation Research Articles

Expectation formation and learning in the labour market with on-the-job search and Nash bargaining

This paper develops a search and matching model with heterogeneous firms, on-the-job search by workers, Nash bargaining over wages and adaptive learning. We assume that workers are boundedly rational in the sense that they do not have perfect foresight about future bargaining outcomes. Instead workers rely on a recursive OLS learning mechanism and base their forecasts on a linear wage regression. We apply adaptive learning to a setting with generalized Nash bargaining and show analytically that the bargaining solution is unique. We use this solution to simulate the model and provide a numerical characterization of the Restricted Perceptions Equilibrium. We show that some job-to-job transitions are socially inefficient since workers can move to less productive employers. Output losses from these transitions decrease with workers’ bargaining power due to a more efficient allocation of workers to jobs. Finally, we find that bounded rationality taking form of adaptive learning can reduce wage inequality among heterogeneous worker groups if workers’ expectations are based on pooled statistical information.

Insights on inflation expectations in the Philippines from a household survey

The study contributes to the literature on expectations by providing insights on household expectations from an emerging market and inflation targeting country like the Philippines. Using the results of the Consumer Expectations Survey (CES), a quarterly household survey conducted by the Bangko Sentral ng Pilipinas (BSP), the study is the first to look at the characteristics and determinants of household inflation expectations in the Philippines at a granular level. Results show that survey-based household expectations in the country are not rational. Filipino households exhibit an upward bias in their forecast of future inflation and they tend to rely more on information about past inflation to form their expectations. Nonetheless, in recent years, households have started to incorporate information about future outcomes in their inflation expectations process. To determine the factors that drive household expectations in the Philippines, aggregated (i.e., time series) and disaggregated (i.e., pooled data) data from CES quarterly survey rounds between 2010 and 2020 are used on a standard inflation expectations model. Empirical results point to a significant effect of income conditions, perceptions on economic and financial conditions, the inflation target, and demographic factors (e.g., educational attainment, marital status) on the formation of household expectations in the Philippines. Based on the findings and observations, the study draws insights for central bank communication strategy, particularly in influencing household expectations.

Limitations of Nature-Inspired Algorithms for Pricing on Digital Platforms

Digital platforms have begun to rely more on algorithms to perform basic tasks such as pricing. These platforms must set prices that coordinate two or more sides that need each other in some way (e.g., developers and users or buyers and sellers). Therefore, it is essential to form correct expectations about how both sides behave. The purpose of this paper was to study the effect of different levels of information on two biology-inspired metaheuristics (differential evolution and particle swarm optimization algorithms) that were programmed to set prices on multisided platforms. We assumed that one platform always formed correct expectations (human platform) while the competitor always used a generic version of particle swarm optimization or differential evolution algorithms. We tested different levels of information that modified how expectations were formed. We found that both algorithms might end up in suboptimal solutions, showing that algorithms needed to account for expectation formation explicitly or risk setting nonoptimal prices. In addition, we found regularity in the way algorithms set prices when they formed incorrect expectations that can help practitioners detect cases in need of intervention.

Measuring Under- and Overreaction in Expectation Formation

Abstract We develop a framework for measuring under- and overreaction in expectation formation. The basic insight is that under- and overreaction to new information is identified (up to sign) by the impulse response function of forecast errors. Our measurement procedure yields estimates of under- and overreaction to different shocks at various horizons. In an application to inflation expectations, we find that forecasters underreact to aggregate shocks but overreact to idiosyncratic shocks. We illustrate how our approach can be used to (i) quantify the importance of different biases; (ii) estimate theoretical models; and (iii) shed light on existing empirical approaches and puzzles.

Teacher expectations in the early primary grades: A scoping review

AbstractTeachers are the single most important in‐school factor affecting student learning outcomes. As a result, researchers and policy makers are particularly interested in the ways that teacher‐level factors influence the learning opportunities that teachers provide in their classrooms. A growing body of research suggests that the expectations a teacher sets for individuals and groups of students can significantly affect the learning opportunities that are provided to them. This is highly problematic, especially since teacher expectations can be inaccurate evaluations of student abilities and teacher expectations differentially affect the learning outcomes of racialised students as well as children living in poverty. Much of the research base regarding teacher expectations has focused on upper elementary and secondary grades with little research focus on the ways that teacher expectations are formed and impact children in the first years of formal schooling. Given the potential impact of sustained teacher expectation effects, an in‐depth review of teacher expectation research in the early primary grades is warranted. This study uses a scoping review methodology (H. Arksey and L. O’Malley, ‘Scoping Studies: Towards a Methodological Framework, International Journal of Social Research Methodology, 2005, 8(1), 19–32) to analyse research on teacher expectations in the early primary grades. Five themes encapsulate the scope of research published from 2000–2021: (1) teacher expectations of school readiness skills, (2) factors that influence the formation of teacher expectations, (3) teacher expectation effects, (4) stability of teacher expectations, and (5) intervention studies. This paper presents the current state of knowledge surrounding expectations in the early primary grades, as well as highlights challenges in need of further research.

Microeconomic analysis of the main ways of decomposition of the cost index

The article considers a microeconomic analysis of the main options for decomposing the value index into price and quantity change factors, as a result of which it becomes possible to interpret these options in terms of changing the expectations of either the consumer or the producer. The purpose of the study is to show that the Laspeyres, Paasche and Fisher indices have not only an estimated, but also an important content function, reflecting changes in the market expectations of economic agents. To achieve the goal, a comparative analysis of the basic formulas of the concepts of adaptive and rational expectations was carried out, as well as a meaningful analysis of the cost aggregates that are components of the Laspeyres, Paasche and Fisher indices, and a schematic diagram of the formation of adaptive and rational expectations was developed. As a methodological basis for solving the problem, the expectation theory, the analogy method, the index method of factor reversibility, and the minimum basis method were used. It is shown that Laspeyres indices are the essence of changes in adaptive expectations, Paasche indices are changes in rational expectations of producers and consumers, and Fisher indices are a joint change in adaptive and rational expectations of economic agents. It is advisable to interpret one of the main methods of decomposition of the cost index into factors as a “buying” method that meets the expectations of the consumer, another — as a “selling” method that meets the expectations of the manufacturer, a decomposition method, the third — as a “compromise” between market expectations of economic agents.

How Large is the Output Cost of Disinflation?

This paper examines estimates of, and drivers for, the sacrifice ratio in the United States. Three approaches are employed. The first reviews the literature on what sacrifice ratio might be expected. The second studies a generic disinflation experiment using 40 estimated macro models of the U.S. economy, calculating a distribution of sacrifice ratios. Those sacrifice ratios are high by historical standards and the paper discusses some stories for why this is so. The role of expectations formation and the credibility of policy is emphasized. The third approach gets under the hood of drivers of the output cost of disinflation by carrying out a selection of disinflation experiments using the FRB/US model, varying certain characteristics of the model’s expectations formation mechanism. Pinning down a precise measure for the output cost of disinflation is challenging. But the literature and policy experiments do offer some guidance on how the sacrifice ratio can be reduced.

Feeling the Squeeze.

People often provide caregiving to other family members across the life course. "Sandwiched" caregiving, or caring for a child and aging parent at the same time, is a common form of combining care duties. However, adults share more years of life with many different family members due to population level demographic shifts in life expectancy and family formation. This shift means that multigenerational care, or providing for two or more different generations of family members simultaneously, may better reflect the reality of caregiving for contemporary cohorts of adults. Although there is strong public backing for providing supports to caregivers, current policies are often limited.

IQ, Expectations, and Choice

Abstract We use administrative and survey-based micro data to study the relationship between cognitive abilities (IQ), the formation of inflation expectations, and the consumption plans of a representative male population. High-IQ men display 50 $\%$ lower forecast errors for inflation than other men. High-IQ men, but not others, have consistent inflation expectations and perceptions over time. In terms of choice, only high-IQ men increase their consumption propensity when expecting higher inflation as the consumer Euler equation prescribes. Education levels, income, other expectations, and socio-economic status, although important, do not explain the variation in expectations and choice by IQ. Recent modelling attempts to incorporate boundedly rational agents into macro models do not fully capture all the facts we document. We discuss which dimensions of expectations formation and choice are important for heterogeneous-agents models of household consumption and for the transmission of fiscal and monetary policy.

How does tenancy affect farmland prices? Effects of lease status, lease term and buyer type

PurposeLease contracts at the time of sale influence buyers' expectations about future returns of farmland ownership and may thus contribute to price dispersion. This paper investigates the conjecture that existing land lease contracts influence buyers' and sellers' costs of being information deficient and thus their bargaining position, their expectation formation about future returns, and thus ultimately the farmland price.Design/methodology/approachThe authors link different levels of information, search, and bargaining costs to three buyer types and their land use intentions. Relying on a rich dataset of farmland transactions in the German Federal State of Saxony-Anhalt from 2014 to 2019, the authors use a hedonic pricing model to investigate five hypotheses applying multivariate one-sided tests.FindingsThe authors find buyer-specific effects related to lease status and lease term of a lot. Tenant buyers pay less than non-farmer buyers for leased lots, whereas non-tenant farmers pay a markup. While prices decrease for all buyer groups with an increasing lease term, this effect is the strongest for non-tenant farmer buyers. This study’s results suggest that an existing lease contract impacts buyers' costs of being information deficient, their bargaining positions and expectation formation, and ultimately the price discovery process.Originality/valueTo the authors’ knowledge, this is the first study that decomposes the effects of tenancy on farmland prices by buyer type and lease term. The study provides insights into price dispersion for identical characteristics of farmland and explains why empirical studies have found mixed or no empirical evidence that lease contracts influence the price discovery process.

Diet choices and self-preserving behavior: New trends in Paleolithic diet

The mode and structure of nutrition clearly have an impact on health. Collected and summarized scientifc data on the positive and negative impact on the health of specifc diets. Self-preservation behavior encourages healthy people and people with chronic illnesses to make intuitive dietary changes to improve health or to prevent ill health. Due to the wide availability of professional information and the lack of basic knowledge among the masses, misconceptions arise that can potentially worsen the state of health. One of the trends of self-preservation behavior in recent years is adherence to the Paleolithic diet. Research shows positive health outcomes in people with overweight and certain chronic diseases, and controversial results in healthy people. Data from scientifc studies on the influence of the Paleolithic diet on metabolic processes, hormonal levels, the cardiovascular system, and the gastrointestinal tract have been accumulated. Results have been obtained confrming the effectiveness of the Paleo diet in metabolic disorders and overweight. There are controversial and conflicting results on the use of the Paleo diet for liver disease and disorders of the intestinal microflora. Data on thyroid disease and inflammatory bowel disease come from small samples and cannot be considered reliable. Based on the available research to date, it can be concluded that the inclusion of a Paleolithic diet in prevention and treatment regimens is possible. In any case, a change in diet should be regarded as a risk factor for the development of chronic diseases. It is necessary to systematically manage the self-preserving behavior of the population, at least in relation to nutrition, due to scattered, contradictory, often unreliable information about the safe composition of the diet. An independent choice of a nutrition system without appropriate qualifcation and assessment of the state can lead to the formation of false expectations from self-preserving behavior in general and the loss of confdence in nutrition as a factor in managing health.

State-owned success in the air

Abstract African Airlines are not commonly associated with success, rather they recall instances of bad management, security concerns, and outdated machinery. This paper focuses on the success of two airlines during the first two postcolonial decades in Africa. During this time, the new national airlines of African states were important symbols of sovereignty, as well as providing crucial mobility for politicians and experts of all kinds. Addressing a gap in the literature on aviation in Africa on the one hand, and the research on state-owned enterprises on the other, the paper takes a closer look at expectation formation and management decisions regarding fleet modernisation and maintenance, as well as Africanisation politics in both enterprises. Contrary to blanket statements that refer to ideological goals as a reason for the failure of African state-owned enterprise, the political goal of independence made Africanisation of staff and the acquisition of company-owned equipment and facilities a priority. Using archival sources, company publications, and observations of contemporaries, it can be shown that through taking advantage of entangled interests of governments and the aviation industry, the two African airlines managed to break into the global air transport market at the beginning of the 1960s and stayed competitive for many years.

A New Theory of Expectations

Expectations are essential for understanding the economic choices of individuals as well as cyclical developments in an economy over time. The initial theory of how people form their expectations was first introduced by Aristotle more than two millennia ago. The core elements he advanced were that forward-looking decisions must be based on expectations and those expectations must be formed by reason, free from the corrupting influence of passion. These guidelines have been formalized in theories of rational expectations. There has been no consensus among social scientists, however, about whether rationality should be defined by how expectations are formed (favored in psychology) or by the outcomes of the formation process (favored in economics). Data collected by the University of Michigan over the past half-century appear to support both views: the psychological thesis of bounded rationality in the formation of expectations by individuals as well as the unbounded rationality thesis of economics when applied to the expectations observed across the entire economy. The goal of this paper is to correct empirical misspecifications, and to incorporate recent advances in neuroscience, including the dominance of nonconscious processes over conscious deliberation, the critical role of affective evaluations, and the formation of expectations by a Bayesian updating procedure. The new theory highlights the importance of contextual factors, and provides a more accurate assessment of costs and benefits. Although these innovations represent a radical departure from orthodox theories, they are justified by the increase in explanatory power provided by this new theory of expectations.

ОБҐРУНТУВАННЯ СПОСОБІВ ПОШУКУ ДИВЕРСІЙНО-РОЗВІДУВАЛЬНИХ ГРУП ПРОТИВНИКА ТА НЕЗАКОННИХ ЗБРОЙНИХ ФОРМУВАНЬ

The implementation of the measures of the joint forces operation to contain and repulse Russian armed aggression in the territory of Donetsk and Luhansk regions, the national security of Ukraine provides a set of multifaceted political, diplomatic, economic, technological, ideological and military measures. Of decisive importance among them are political measures aimed at creating favorable conditions for the state, eliminating existing and potential threats, and localizing them. The experience of conducting combat operations in the Joint Forces operation, namely, the performance of tasks by units of the Armed Forces of Ukraine and other components of the defense forces in stabilization operations while strengthening the protection of the state border, isolating the armed conflict, combating enemy sabotage and reconnaissance groups and illegal armed formations, indicates that that the classical ways of performing tasks are not rational. In preparation for and during active combat operations in order to destabilize the situation, sabotage mobilization measures and the operational deployment of troops, isolate the battlefield, complicate maneuver, disrupt command and control of troops and weapons, rear services, etc. the enemy will carry out large-scale sabotage, reconnaissance and other subversive actions in the zone of responsibility of operational formations (formations). At the same time, illegal armed formations will be organized and operate, which will be involved in carrying out destabilization actions. The article considers a calculation method for searching for enemy sabotage and reconnaissance groups and illegal armed formations in a given area, taking into account the peculiarities of modern armed conflicts and the forces and means involved (used) in this process. Keywords: search, sabotage and reconnaissance group, illegal armed formation of mathematical expectation, probability of an event.

Early growing season weather variation, expectation formation and agricultural land allocation decisions in Ethiopia

AbstractUsing unique crop‐specific data gathered over 7 years, we study if and how maize‐producing farmers in Ethiopia adjust their land allocation decisions in response to pre‐planting‐season weather variations. We show that farmers adjust their land allocation decisions in response to increased temperatures early in the growing season. In addition to quantifying a substantial adaptation margin that has not been documented before, our study also reveals the presence of a weather variation‐induced expansion of maize production into areas that are less suitable for maize cultivation.

The closer we get, the better we are?

AbstractNot always. A general requirement in models of expectations formation is that forecast accuracy should improve when getting closer to the target date. We apply a multi‐horizon bootstrap test to a unique Israeli survey of firm‐level inflation forecasts, which encompasses periods of three digits annual rates, and periods of moderate and low inflation. We find that improvements in forecast accuracy were significant during high and moderate inflation periods, but not in the low‐inflation environment. The results are in line with rational inattention, induced by a decline in inflation predictability. Further support is provided by evidence from the US SPF survey.

Monetary policy and speculative asset markets

I study monetary policy in an estimated financial New-Keynesian model extended by behavioral expectation formation in the asset market. Credit frictions create a feedback between asset markets and the macroeconomy, and behaviorally motivated speculation can amplify fundamental swings in asset prices, that potentially cause endogenous, nonfundamental bubbles and bursts. Booms in asset prices improve firms financing conditions and are therefore deflationary. These features significantly improve the power of the model to replicate empirical key moments. A monetary policy that targets asset prices can dampen financial cycles and reduce volatility in asset markets (dampening effect). This comes at the cost of creating an additional channel through which asset price fluctuations transmit to macroeconomic fundamentals (spillover effect). I find that unless financial markets are severely overheated, the undesirable fluctuations in inflation and output caused by the spillover effect more than outweigh the benefits of the dampening effect.

Biased survival expectations and behaviours: Does domain specific information matter?

We study the formation of biased expectations across domains and examine whether they have a unique influence on health and financial behaviors. Combining individual-level longitudinal, retrospective, and end of life data from several European countries for more than a decade, we estimate the time-varying individual level bias in ‘survival expectations' (BSE) and compare it to a similar type of bias in the formation of ‘meteorological expectations' (BME). We exploit the variation across individual's family history (parental age at death) to evaluate the causal effect of BSE on health and financial behaviors, and we compare it to the effect of BME. This allows to investigate whether the BSE effect is due to private information, or another mechanism. We find that BSE increases the likelihood of engaging in less risky health and financial behaviors. We estimate that a one standard deviation increase in BSE reduces the average individual probability of smoking by 48% (and increase the probability of holding retirement accounts by 69%). In contrast, BME has little effect on healthy behaviors, and is only associated with a change in some financial behaviors.

Monetary Policy Uncertainty and Inflation Expectations*

AbstractDo inflation expectations react to changes in the volatility of monetary policy? They have, but only until the global financial crisis. This paper investigates whether increasing the dispersion of monetary policy shocks, which is interpreted as elevated uncertainty surrounding monetary policy, affects the inflation expectation formation process. Based on US data since the 1980s and a stochastic volatility‐in‐mean structural VAR model, we find that monetary policy uncertainty reduces both inflation expectations and inflation. However, after the Great Recession this link has disappeared, even when controlling for the Zero Lower Bound.

The Role of the Media in the Inflation Expectation Formation Process

This research highlights the role played by the media in the formation of inflation expectations among various respondents in Ukraine. Using a large news corpus and machine-learning techniques, I have constructed newsbased metrics that produce quantitative indicators for texts, which show if the news topics are relevant to inflation expectations. I have found evidence that various news topics may have an impact on inflation expectations, and can explain part of their variance. Thus, my results could help in the analysis of inflation expectations – which is of value, given that anchoring inflation expectations remains a key challenge for central banks.