Biased beliefs in dynamic decisions

Current Project

Department

Public Economics

Project Management

Georg Weizsäcker
Christoph Breunig

Project Period

January 1, 2017 - December 31, 2020

Commissioned by

DFG/SFB

Funded by

DFG

In Cooperation With

Humboldt University Berlin

Households face many dynamic decision problems where relevant market prices and budget constraints are realized only in the future. This makes optimal decision-making difficult as optimality requires an accurate quantification and interpretation of the dynamic processes operating in the market. The studies in this project elicit and test the households’ expectations about relevant future variables in competitive markets. We focus on two areas that arguably contain the most important sets of economic decisions in a household’s lifecycle: decisions in labor markets and decisions in markets for household finance products. In each case, we analyze the implications of biased beliefs about the relevant market prices on household behavior. We aim to enhance the existing analytical approaches by incorporating recent hypotheses from the behavioral economics literature, testing whether the standard, neoclassical approach suffices to explain the main data patterns, or whether the enhanced, behavioral-economics models are of significant quantitative relevance.

DIW Team