Viet Nguyen, Melbourne Institute - The downside of being upbeat: Consumer cognitive biases can affect real economic activity

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Title: The downside of being upbeat: Consumer cognitive biases can affect real economic activity

Abstract: Using a quarterly consumer expectations survey, we propose two novel measures of consumer optimism, ex ante optimism and ex post optimism. We demonstrate empirically that excessive optimism about future family fi nances impacts the real economy. The excessive optimism (ex ante optimism) compels consumers to save less and borrow more, putting upward pressure on consumption growth. When family finances improve persistently less than expected (ex post optimism), consumers cut back on credit and save more which puts downward pressure on consumption growth. This saving and borrowing channel of the optimism bias is robust to consumer age.

Presenter: Viet Nguyen, Melbourne Institute

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