Extrapolative Uncertainty and Household Economic Behavior

Management Science, Forthcoming

34 Pages Posted: 13 Dec 2018 Last revised: 7 Dec 2023

See all articles by Elyas Fermand

Elyas Fermand

Santa Clara University - Department of Finance

Camelia M. Kuhnen

University of North Carolina (UNC) at Chapel Hill - Finance Area

Geng Li

Board of Governors of the Federal Reserve System

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 14, 2023

Abstract

We examine the uncertainty in households’ expectations regarding macroeconomic outcomes, namely, inflation and the rate of nationwide home price growth. We document that people extrapolate from the instability of their personal and local environment when assessing the future volatility of these macroeconomic variables. Consequently, there are within-person spillovers in subjective uncertainty regarding different economic outcomes. This extrapolative behavior is more pronounced among lower-numeracy individuals, and it persists throughout the business cycle. People with more uncertain macroeconomic expectations are more likely to engage in precautionary behaviors regarding consumption and equity market exposure, and are more concerned about credit market access.

Keywords: uncertainty, extrapolation, expectations, precautionary behavior, consumption, credit, portfolio choice, socioeconomic status

JEL Classification: D14, D83, D84, G02, G11

Suggested Citation

Fermand, Elyas and Kuhnen, Camelia M. and Li, Geng and Ben-David, Itzhak, Extrapolative Uncertainty and Household Economic Behavior (March 14, 2023). Management Science, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3293399 or http://dx.doi.org/10.2139/ssrn.3293399

Elyas Fermand

Santa Clara University - Department of Finance

Santa Clara, CA 95053
United States

Camelia M. Kuhnen (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

UNC Kenan-Flagler Business School
300 Kenan Center Dr., MC #4407
Chapel Hill, NC 27599-3490
United States
(919) 9623284 (Phone)

HOME PAGE: http://sites.google.com/view/cameliakuhnen/

Geng Li

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Fisher 700D
Columbus, OH 43210-1144
United States
773 988 1353 (Phone)

HOME PAGE: http://https://u.osu.edu/ben-david.1/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/

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