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The downside of being upbeat: Consumer cognitive biases can affect real economic activity

Author

Listed:
  • Edda Claus

    (Wilfrid Laurier University)

  • Viet Hoang Nguyen

    (Melbourne Institute: Applied Economic & Social Research, The University of Melbourne)

Abstract

Using a quarterly consumer expectations survey, we propose two novel measures of consumer optimism, ex ante optimism and ex post optimism. We demonstrate empirically that excessive optimism about future family finances impacts the real economy. The excessive optimism (ex ante optimism) compels consumers to save less and borrow more, putting upward pressure on consumption growth. When family finances improve persistently less than expected (ex post optimism), 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.

Suggested Citation

  • Edda Claus & Viet Hoang Nguyen, 2020. "The downside of being upbeat: Consumer cognitive biases can affect real economic activity," Melbourne Institute Working Paper Series wp2020n11, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    • Handle: RePEc:iae:iaewps:wp2020n11
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    File URL: https://melbourneinstitute.unimelb.edu.au/__data/assets/pdf_file/0010/3429217/wp2020n11.pdf
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    More about this item

    Keywords

    Cognitive Bias; Saving; Borrowing; Consumption; Expectations Survey Data.;
    All these keywords.

    JEL classification:

    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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