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The Rationality and Reliability of Expectations Reported by British Households: Micro Evidence from the British Household Panel Survey

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  • Dr Martin Weale
  • Dr. James Mitchell

Abstract

This paper assesses the accuracy of individuals' expectations of their financial circumstances, as reported in the British Household Panel Survey, as predictors of outcomes and identifies what factors influence their reliability. Bivariate ordered probit models, appropriately identified, are estimated to draw out the differential effect of information on expectations and realisations. Rationality is then tested and we seek to explain deviations of realisations from expectations at a micro-economic level, possibly with reference to macroeconomic shocks. A bivariate regime-switching ordered probit model, distinguishing between states of rationality and irrationality, is then estimated to try and explain departures from rationality and identify whether certain individual characteristics are associated with rational behaviour.

Suggested Citation

  • Dr Martin Weale & Dr. James Mitchell, 2007. "The Rationality and Reliability of Expectations Reported by British Households: Micro Evidence from the British Household Panel Survey," National Institute of Economic and Social Research (NIESR) Discussion Papers 287, National Institute of Economic and Social Research.
    • Handle: RePEc:nsr:niesrd:287
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    Cited by:

    1. Bovi, Maurizio, 2009. "Economic versus psychological forecasting. Evidence from consumer confidence surveys," Journal of Economic Psychology, Elsevier, vol. 30(4), pages 563-574, August.
    2. Péter Gábriel, 2010. "Household inflation expectations and inflation dynamics," MNB Working Papers 2010/12, Magyar Nemzeti Bank (Central Bank of Hungary).
    3. Magdalena Szyszko, 2017. "Central Banks Inflation Forecast and Expectations. A Comparative Analysis," Prague Economic Papers, Prague University of Economics and Business, vol. 2017(3), pages 286-299.
    4. Sarah Brown & Mark N. Harris & Christopher Spencer & Karl Taylor, 2020. "Financial Expectations and Household Consumption: Does Middle Inflation Matter?," Working Papers 2020002, The University of Sheffield, Department of Economics.
    5. Magdalena Szyszko & Aleksandra Rutkowska, 2019. "Forward-looking component in consumers’ expectations and inflation forecast targeting: the case of six European economies," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 37(1), pages 77-112.
    6. Maurizio Bovi, 2008. "The “Psycho-analysis” of Common People’s Forecast Errors. Evidence from European Consumer Surveys," ISAE Working Papers 95 Classification-JEL C42, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
    7. Piotr Białowolski, 2016. "The influence of negative response style on survey-based household inflation expectations," Quality & Quantity: International Journal of Methodology, Springer, vol. 50(2), pages 509-528, March.
    8. David G. Blanchflower & Conall MacCoille, 2009. "The formation of inflation expectations: an empirical analysis for the UK," NBER Working Papers 15388, National Bureau of Economic Research, Inc.
    9. Abubakar Mammadi & Habu Mallam Baba & Sadiq Tukur & Abdul Azeez Adam Muhammad & Umar Abdullahi, 2020. "Measuring Residents Satisfaction Levels of Public Housing in Maiduguri Metropolis of Borno State, Nigeria," Traektoriâ Nauki = Path of Science, Altezoro, s.r.o. & Dialog, vol. 6(3), pages 3001-3020, Macrh.
    10. Sarah Brown & Karl Taylor, 2008. "Expectations, Reservation Wages And Employment: Evidence From British Panel Data," Working Papers 2008007, The University of Sheffield, Department of Economics, revised May 2008.

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    More about this item

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D19 - Microeconomics - - Household Behavior - - - Other

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