ArticlePublisher preview available

A New Theory of Expectations

Authors:
Richard T. Curtin
Richard T. Curtin
Richard T. Curtin
  • This person is not on ResearchGate, or hasn't claimed this research yet.
Read publisher preview
Download citation
To read the full-text of this research, you can request a copy directly from the author.

Abstract

Expectations are essential for understanding the economic choices of individuals as well as cyclical developments in an economy over time. The initial theory of how people form their expectations was first introduced by Aristotle more than two millennia ago. The core elements he advanced were that forward-looking decisions must be based on expectations and those expectations must be formed by reason, free from the corrupting influence of passion. These guidelines have been formalized in theories of rational expectations. There has been no consensus among social scientists, however, about whether rationality should be defined by how expectations are formed (favored in psychology) or by the outcomes of the formation process (favored in economics). Data collected by the University of Michigan over the past half-century appear to support both views: the psychological thesis of bounded rationality in the formation of expectations by individuals as well as the unbounded rationality thesis of economics when applied to the expectations observed across the entire economy. The goal of this paper is to correct empirical misspecifications, and to incorporate recent advances in neuroscience, including the dominance of nonconscious processes over conscious deliberation, the critical role of affective evaluations, and the formation of expectations by a Bayesian updating procedure. The new theory highlights the importance of contextual factors, and provides a more accurate assessment of costs and benefits. Although these innovations represent a radical departure from orthodox theories, they are justified by the increase in explanatory power provided by this new theory of expectations.
A preview of this full-text is provided by Springer Nature.
Learn more
Content available from Journal of Business Cycle Research
This content is subject to copyright. Terms and conditions apply.
Vol.:(0123456789)
Journal of Business Cycle Research (2022) 18:239–259
https://doi.org/10.1007/s41549-022-00074-w
1 3
RESEARCH PAPER
A New Theory ofExpectations
RichardT.Curtin1
Received: 8 November 2021 / Accepted: 18 August 2022 / Published online: 5 September 2022
© The Author(s), under exclusive licence to Springer Nature Switzerland AG 2022
Abstract
Expectations are essential for understanding the economic choices of individuals as
well as cyclical developments in an economy over time. The initial theory of how
people form their expectations was first introduced by Aristotle more than two mil-
lennia ago. The core elements he advanced were that forward-looking decisions
must be based on expectations and those expectations must be formed by reason,
free from the corrupting influence of passion. These guidelines have been formal-
ized in theories of rational expectations. There has been no consensus among social
scientists, however, about whether rationality should be defined by how expecta-
tions are formed (favored in psychology) or by the outcomes of the formation pro-
cess (favored in economics). Data collected by the University of Michigan over the
past half-century appear to support both views: the psychological thesis of bounded
rationality in the formation of expectations by individuals as well as the unbounded
rationality thesis of economics when applied to the expectations observed across the
entire economy. The goal of this paper is to correct empirical misspecifications, and
to incorporate recent advances in neuroscience, including the dominance of noncon-
scious processes over conscious deliberation, the critical role of affective evalua-
tions, and the formation of expectations by a Bayesian updating procedure. The new
theory highlights the importance of contextual factors, and provides a more accu-
rate assessment of costs and benefits. Although these innovations represent a radical
departure from orthodox theories, they are justified by the increase in explanatory
power provided by this new theory of expectations.
Keywords Expectation theory· Measurement of expectations· Non-conscious
cognitive expectations· Cyclical indicators
Isaac Kerstenetzky Lifetime Scholarly Achievement Award Lecture, presented at the 2021 CIRET
Conference held at Poznan, Poland on September 16, 2021 (www.ciret.org).
* Richard T. Curtin
Curtin@umich.edu
1 University ofMichigan, AnnArbor, USA
Content courtesy of Springer Nature, terms of use apply. Rights reserved.
... I quote Curtin directly because he makes an important point relative to expectations and decision-making. Curtin argued that: (Curtin R. 2022, Section 1.11) 3 ...
The Effect of Expected Demand on Employment in the United States
Thesis
Full-text available
  • Jun 2024
The objective of this dissertation is to determine the effect of expected demand on aggregate employment in the United States (U.S.) for the period 1948 Q1 to 2023 Q3. The relationship is studied using both qualitative and quantitative analysis. My work is primarily based on expectations theory and on Keynesian economic theory, carefully considering the work of Lucas, Muth, and Sargent on expectations theory; and the work of Keynes on unemployment and effective demand. My model results indicate that economic expectations have a significant effect on aggregate employment. The Research Problem is “What are the determinants of changes in aggregate employment in the United States of America (U.S.)?” This is an important research topic because significant increases in unemployment can have profound effects on an entire society, not just on its unemployed workers. When unemployment increases significantly, public health declines, crime increases, suicides increase, and public revenues decrease. Government is then placed in the unenviable position of facing increased demand for public services at the very time that public revenue is declining. The Research Hypothesis is “Firms increase and decrease employment in response to changes in expected demand.” Two proxies for expected demand are used in the dissertation: nonresidential fixed investment, and personal consumption expenditures. The literature review was used to identify specific variables that some labor economists believe have a significant impact on employment. The literature review identifies two major research gaps in the study of aggregate employment in the U.S. These gaps are a shortage of papers on the effect of expected demand on aggregate employment; and that papers on expected demand and aggregate employment have not been updated to account for the economic effects of Covid-19, which began in the autumn of 2019. The author addresses these research gaps by submitting a dissertation on expected demand and aggregate employment; and by including data for the period 1948 Q1 to 2023 Q3, thereby accounting for the economic effect of the Covid-19 pandemic. As a result of the Covid lockdowns, civilian employment declined by twenty-two million jobs from February 2020 to April 2020. The U.S. government then spent approximately $5 trillion dollars to provide relief to businesses, individuals, and local government. As a result of the relief programs, total employment rose from 130.4 million in April 2020 to 156.9 million in December 2023. The relief programs increased disposable income thereby increasing personal consumption. In so doing, government changed expectations as measured by personal consumption expenditures and nonresidential fixed investment. The increase in personal consumption raised business expectations and resulted in increases in nonresidential fixed investment, which increased employment. The empirical results confirm my hypothesis. A total of sixteen models are presented in this dissertation. Every one of these models indicate that the two expected demand proxies have a significant effect on employment at below the 0.05 level. The short-run models used included OLS, WLS, and ARCH-family models. A Fractionally Integrated GARCH (FIGARCH) model was used to estimate the long-run effects. The FIGARCH model estimated that the two expected demand proxies accounted for over 41% of the average change in employment over the course of this study.
View
From Information to Worry: How Selective Interrogation of Information Shapes Expectancies in the Prenatal Period
Article
Full-text available
  • Nov 2024
  • COGNITIVE THER RES
The current study examined the association between elevated prenatal worry and negative expectancies about parenthood and the potential cognitive mechanisms driving such expectancies. Two main hypotheses were examined: First, that negative expectancies about parenthood contribute to elevated prenatal worry, and second, negative selective interrogation of information about parenthood contributes to the formation of more negative expectancies about parenthood. The study recruited 92 first-time pregnant women and evaluated their prenatal worry, parenthood expectancies, and tendency to volitionally choose negative rather than positive information about parenthood (i.e., demonstrate a negative interrogation bias). Our findings revealed a significant association between negative expectancies about parenthood and elevated prenatal worry. Additionally, those with a negative interrogation bias were more likely to hold negative expectancies concerning parenthood. The relationship between this bias and prenatal worry was mediated by negative expectancies. Findings are discussed with regards to limitations and potential implications for expectancy-focused interventions for prenatal worry.
View
View
INFLATION VS INFLATION EXPECTATIONS IN 2020–2021 – THE IMPACT OF THE COVID-19 PANDEMIC
Article
Full-text available
  • Jun 2024
Aim: During the COVID-19 pandemic in 2020–2021, there was a significant increase in inflation and inflation expectations due to the government policies of the United States (US) and the European Union (EU), including the Euro Area (EA). With that being said, the evolving situation within these three po­litical-economic areas highlights the importance of understanding the relationship between inflation and inflation expectations, as perceived by both consumers and professional forecasters. The purpose of this article is to analyze the changes in these phenomena, using descriptive survey’ data analysis and a hybrid model of inflation expectations. Methods: The research methods refer to the descriptive survey data anal­ysis that provides evidence on the long-term courses of inflation in the US, the EU, and the EA, as well as the consumers’ and professional forecasters’ inflation expectations within the period 1999–2019. A hybrid model of inflation expectations has been used to estimate this data during the period of 2021. The study correlates and compares the findings of both types of research. Results: The results demonstrate that dur­ing the pandemic, the evidence supports the occurrence of periodic medium-high inflation in the studied economic areas. Inflation expectations in the US and the EU were periodically weakly anchored, although they were stabilized in the EA. Conclusions: The research, conducted by analyzing price trends and their expected trajectories over various timeframes, revealed consistent patterns. These patterns highlighted similarities in anticipated price changes before and during the pandemic.
View
View
Enflasyon Bekleyişlerinin Oluşumu: Davranışsal İktisat Açısından Bir AnalizFormation of Inflation Expectations: An Analysis in terms of Behavioral Economics
Article
Full-text available
  • Jun 2023
Enflasyon bekleyişleri gerçek enflasyonun önemli bir belirleyicisi olduğundan para politikasının yürütülmesinde önemli bir rol oynamaktadır. Merkez bankaları, iktisadi birimlerin enflasyon bekleyişlerini kontrol ederek enflasyon hedefiyle uyumlu olması için çabalamaktadır. Bu uyumun gerçekleşmesi durumunda merkez bankaları enflasyondaki dalgalanmaları daha rahat yönetebilme olanağına sahip olmakta ve enflasyonu kontrol etmede daha başarılı sonuçlar elde etmektedirler. Enflasyon bekleyişleriyle ilgili olarak ana akım iktisatta temel paradigma rasyonel bekleyişler hipotezidir. Bu hipoteze göre iktisadi birimler var olan tüm bilgiden yararlanarak bekleyişlerini oluşturmakta ve enflasyon konusunda optimal tahminlerde bulunmaktadırlar. Rasyonel bekleyişlere dayalı olarak enflasyon tahminleri yapılırken üstelik bilginin homojen dağıldığı ve bu bilgiyi sınırlayan psikolojik faktörlerin de aynı olduğu kabul edilmektedir. Fakat davranışsal iktisat alanında yapılan çalışmalar, enflasyon tahminlerini çevreleyen eksik bilginin ve belirsizliğin önemini ve enflasyon konusunda tutulan inançların zamanla değişebilmesini, dolayısıyla heterojenliği, temel alarak rasyonel bekleyişler hipotezine eleştiriler getirmişlerdir. Bu eleştirilerin sonucunda enflasyon bekleyişlerinin oluşumunu açıklamada alternatif davranışsal yaklaşımlar geliştirilmiştir. Bu yaklaşımların en önemlileri yapışkan bilgi modeli, rasyonel dikkatsizlik yaklaşımı, epidemiyolojik bekleyişler modeli ve Bayesyen öğrenme modelidir. Bu kapsamda çalışmanın temel amacı teorik ve ampirik literatür temelinde enflasyon bekleyişlerinin gerçek yaşamda, rasyonel bekleyişlerden farklı olarak, nasıl oluştuğunu davranışsal iktisat bağlamında ortaya koymaktır. Çalışmada enflasyon bekleyişlerinin, bireysel davranışlardaki heterojenliğin sonucu olarak, rasyonel bekleyişler hipotezine aykırı biçimde oluştuğu, davranışsal iktisadın enflasyon bekleyişlerinin oluşumunu farklı psikolojik yaklaşımlar ile açıklayarak merkez bankalarına hem fiyat istikrarını sağlamada hem de etkin bir para politikası izlemede önemli bir katkı sağladığı sonucuna ulaşılmıştır. Çalışma enflasyon bekleyişlerini rasyonel bekleyişler yaklaşımına göre açıklayan modellerdeki eksikliği ortaya koyarak bu eksikliği gidermede davranışsal yaklaşımların önemini ortaya koymuştur.
View
Growth in US Durables Spending: Assessing the Impact of Consumer Ability and Willingness to Buy
Article
Full-text available
  • Mar 2021
This study makes use of two sets of variables in order to explain the behavior of growth in US consumer durables spending. The first set includes income and wealth growth as the determinants of consumer “ability to buy” in addition to changes in real interest rates. The second set includes detailed consumer durables-buying attitudes as the determinants of consumer “willingness to buy.” Our estimation results for 1988–2019 reveal that income and wealth growth in addition to changes in real interest rates significantly explain durables spending growth. Attitudinal factors that significantly explain durables spending growth include the difference of opinion of consumers as to whether prices are low or high, whether interest rates are low or high in addition to the difference of opinion of consumers regarding prosperous times versus uncertain future. Such evidence highlights the importance of detailed consumer durables-buying attitudes and offers insightful policy implications for stabilizing growth in durables spending.
View
Consumers Confidence and Households Consumption in Brazil: Evidence from the FGV Survey
Article
Full-text available
  • Apr 2020
The deterioration of Consumer Confidence has been considered an important driver of the recent financial crisis. However, empirical evidence on the relationship between confidence and household consumption is often inconclusive; in many cases, available analysis does not seem to confirm that confidence is able to predict expenditures once the role of economic fundamentals has been accounted for. Nevertheless, generally speaking, most of the literature refers to the most advanced economies of Europe and the USA, while evidence for emerging economies remains scarce. The main aim of this paper is to fill this gap for Brazil, looking at Consumer Survey data published by the Fundação Getulio Vargas since 2005, and studying its relationship with Brazilian consumption expenditures. According to the results, the overall Consumer Confidence Index and the Present Situation Index are good predictors of consumption, helping to improve the goodness of fit of consumer spending forecasting models. We also show that in Brazil a positive shock to confidence has a positive and significant impact on consumption for at least three quarters, a finding similar to those for more industrialized countries.
View
The Predictive Content of Business Survey Indicators: Evidence from SIGE
Article
Full-text available
  • May 2017
Business surveys indicators represent an important tool in economic analysis and forecasting practices. While there is wide consensus on the coincident properties of such data, there is mixed evidence on their ability to forecast macroeconomic developments in the short term. In this study we extend the previous research on business surveys predictive content by examining for the first time the leading properties of the main business survey indicators coming from the Italian survey on inflation and growth expectations (SIGE). To this end we provide a complete characterization of the business cycle leading/coincident properties of SIGE data (turning points, average duration, synchronization etc.) with respect to the National Accounts reference series using both non parametric approaches (i.e. Harding and Pagan in J Monet Econ 49(2):365–381, 2002) and econometric models (discrete and continuous dynamic single equation models). Overall the results indicate that in both the approaches SIGE business indicators are able to early detect turning points of their corresponding national account reference series in almost all cases. Overall, the average lead of troughs is found to be higher than the average lead of peaks.
View
SURVEY MEASURES OF INFLATION EXPECTATION
Article
Full-text available
  • Jun 2012
The research objective was to analyze various survey measures of inflation expectation in Indonesia. We found that the heterogeneity of inflation expectationamong economic agents and professional forecastersfor short forecast horizon is very low. Survey measures of inflation expectation appear to be forward looking, but only for relatively short horizon. Although the magnitude and length vary across measures of inflation expectation, we find that shock to inflation expectation significantly affect the dynamics of the actual inflation rate. Based on the accuracy, the effect on actual inflation and directional information that they have in predicting current and future inflation, inflation expectation from Consensus Forecast outperformed the others. Keywords: Inflation expectation, Vector Auto Regression, balanced score. JEL Classification: C42, E31
View
Determinants of Consumer Sentiment Over Business Cycles: Evidence from the US Surveys of Consumers
Article
Full-text available
  • Dec 2016
We study the information content of the University of Michigan’s Index of Consumer Sentiment as well as its five components. Using household data from the Surveys of Consumers over 1979-2013, we identify the main determinants of these indicators and document their varying role over the business cycle. Our results suggest that while at the aggregate level, macroeconomic conditions explain sentiment well, important and additional information is contained at the level of households. We compare the role of objective and subjective information in determining household level sentiment, and show that significant heterogeneity in the absorption of news from local network sources is a major feature of consumer sentiment. The differential interpretation of current macroeconomic conditions is found to be more pervasive in periods of falling sentiment that typically predates business cycle peaks, and thus helps sentiment to foreshadow recessions.
View
View
View
View
Consumer Expectations: Micro Foundations and Macro Impact
Book
  • Feb 2019
Cambridge Core - Economics: General Interest - Consumer Expectations - by Richard Thomas Curtin
View
The Predictive Content of Business Survey Indicators: Evidence from SIGE
Article
  • Oct 2015
Business survey indicators represent an important tool in economic analysis and forecasting practices. While there is wide consensus on the coincident properties of such data, there is mixed evidence on their ability to predict macroeconomic developments in the short term. In this study we extend the previous research on the predictive content of business surveys by examining the leading properties of the main business survey indicators of the Italian Survey on Inflation and Growth Expectations (SIGE). To this end, we provide a complete characterization of the business cycle properties of survey data (volatility, stationarity, turning points etc.) and we compare them with the national accounts reference series. We further analyse the ability of SIGE indicators to detect turning points using both discrete and continuous dynamic single equation models as compared with their benchmark (B)ARIMA models. Overall, the results indicate that SIGE business indicators are able to make detect early the turning points of their corresponding national account reference series. These findings are very important from a policy-making point of view.
View