This explains the average upward biases in household forecasts of unemployment and inflation. Although our theory allows for optimism, we find that household survey data are consistent with pessimism on average. This time-varying pessimism and optimism provides a parsimonious way to match all our documented empirical facts. In contrast to the rational-expectations framework, in which the expectations of economic agents equal the model-implied forecasts, pessimistic households in our model overestimate (and optimistic households underestimate) the probability of adverse future outcomes relative to the model-implied forecast. We develop a quantitative model of time-varying pessimism and optimism that is consistent with these facts. In line with evidence from the Bank of England/Kantar Inflation Attitudes Survey linking higher inflation to lower expectations of economic conditions, we interpret the forecasts of higher unemployment and inflation as pessimism. We refer to this difference between the household and statistical (or rational) forecasts as a "belief wedge." Furthermore, in the cross section, households that expect higher inflation relative to the population also tend to expect higher unemployment. 1 Using the University of Michigan Surveys of Consumers (Michigan survey), we show that household forecasts for unemployment and inflation are biased upward on average relative to a statistical forecast and that both biases increase significantly during recessions. In a recent working paper, we document systematic biases in household forecasts for unemployment and inflation in both time-series and cross-sectional data. Survey data allow us to measure how the expectations of different economic agents fluctuate over time, providing evidence to test theories of expectation formation and allowing us to quantify their effects. These individual decisions can lead to aggregate fluctuations in output, employment and prices. For instance, a more pessimistic outlook can lead households to save more and firms to hire less. Expectations about the future are important drivers of the economy.
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Galton was impressed by how well people he met had adapted to their harsh desert environment (Kalahari).Anthropologist and explorer (sought source of the Nile).Meteorologist, experimented with stereoscopic photos, studied fingerprints, invented an early teletype.Galton was one of the last amateur scientists, with eclectic interests:.Dar win’s theory raised questions about the adaptive value of consciousness and mind & survival.His methods were repeated by Jane Goodall, Piaget, and B.F.Darwin kept detailed records on the growth of his son, Erasmus, and published them in “A Biographical Sketch of an Infant” in Mind, 1877.Darwin studied facial expressions, anticipating later research by Paul Ekman.“The Expression of the Emotions in Man & Animals.”.Gregor Mendel demonstrated inheritance of physical characteristics in plants and laid the foundation for modern genetics.Lamarck proposed that acquired characteristics can be inherited by offspring, speeding up change.Darwin suggested no genetic mechanism for evolutionary change.Morgan’s canon: “In no case may we interpret an action as the outcome of the exercise of a higher psychical faculty if it can be interpreted as the outcome of the exercise of one which stands lower in the psychological scale.”.In “The Descent of Man,” Darwin argued that “there is no fundamental difference between man and the higher mammals in their mental faculties.” (1871).Do we share behavioral, emotional and cognitive characteristics with other species?.His theory was hotly debated (see famous Oxford Wilberforce/Huxley debate on pg 308 of text).In 1859, he published his “Origin of the Species,” which sold out immediately.
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