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

48 Pages Posted: 8 Jun 2016

See all articles by James Mitchell

James Mitchell

National Institute of Economic and Social Research (NIESR)

Martin R. Weale

National Institute of Economic and Social Research (NIESR)

Date Written: 2007

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. As the data are qualitative 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 identify whether individual characteristics affect the probability of an individual using some alternative model to rationality to form their expectations.

Keywords: household behaviour, expectation formation

JEL Classification: D84, D19

Suggested Citation

Mitchell, James and Weale, Martin R., The Rationality and Reliability of Expectations Reported by British Households: Micro Evidence from the British Household Panel Survey (2007). Bundesbank Series 1 Discussion Paper No. 2007,19, Available at SSRN: https://ssrn.com/abstract=2785294

James Mitchell (Contact Author)

National Institute of Economic and Social Research (NIESR) ( email )

2 Dean Trench Street
Smith Square
London SW1P 3HE
United Kingdom

Martin R. Weale

National Institute of Economic and Social Research (NIESR) ( email )

2 Dean Trench Street
Smith Square
London SW1P 3HE
United Kingdom

HOME PAGE: http://www.niesr.ac.uk/

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