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What to Expect when you are Expecting Rationality: Testing Rational Expectations using Micro Data

  • Hugo Benítez-Silva

    (SUNY – Stony Brook)

  • Debra S. Dwyer

    (SUNY – Stony Brook)

This paper tests the Rational Expectations (RE) hypothesis regarding retirement expectations, controlling for sample selection, reporting biases, and unobserved heterogeneity. We find that retirement expectations in the Health and Retirement Study (HRS) are consistent with the RE hypothesis. We also examine how a wide array of factors, such as wealth, income, health insurance, pensions, and health status influence retirement expectations formation using panel data from all available waves of the HRS. We further analyze how new information affects the evolution of retirement expectations and discover that, on average, individuals correctly anticipate most uncertain events when planning their retirement, except for some health conditions and economic factors. Our results have important implications for a wide variety of models in economics that assume rational behavior.

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Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp037.

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Length: 38 pages
Date of creation: Jun 2003
Date of revision:
Handle: RePEc:mrr:papers:wp037
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  25. Michael Hurd & Monika Reti, 2003. "The Effects of Large Capital Gains on Work and Consumption: Evidence from Four Waves of the HRS," Working Papers 03-14, RAND Corporation Publications Department.
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  29. B. Douglas Bernheim, 1990. "How Do the Elderly Form Expectations? An Analysis of Responses to New Information," NBER Chapters, in: Issues in the Economics of Aging, pages 259-286 National Bureau of Economic Research, Inc.
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