Macroeconomic Conditions and Updating of Expectations by Older Americans

Economic theory suggests that individuals’ decisions about consumption, saving, and labor supply should be directly linked to subjective expectations about future events. Because of this, a growing literature has emerged that examines individuals’ subjective probability expectations, aided by an expanded set of household surveys that ask questions to elicit expectations of respondents. A great deal of research has been done in recent years validating these questions as predictors of future behavior. However, much less attention has been paid to how individuals form and update their expectations. Expectations of older cohorts of individuals are particularly important to examine, given the importance these expectations are likely to play in retirement planning and timing decisions that are costly to reverse.

In this project we investigate expectation formation, using data from the 1994-2008 Health and Retirement Study, linked to data on local and national macroeconomic conditions collected from a number of data sets. We look at two types of subjective expectations questions – those related to macroeconomic and policy conditions, and those related to individual-level situations such as labor supply and household wealth.