Current Conditions Alter Future Expectations
Researchers at the University of Michigan found that expectations for future events are influenced by current economic conditions. Individuals alter their expectations based on prevailing data.
Purvi Sevak, an associate professor of economics at Hunter College, and Lucie Schmidt, an associate professor of economics at Williams College, reviewed data from the 1994–2008 Health and Retirement Study. This study was conducted by the Survey Research Center at the University of Michigan. It asked detailed questions about current and past labor supply, household wealth, and other topics. Respondents were individuals who were nearing retirement.
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Sevak and Schmidt found that survey respondents changed their future expectations based on current conditions. For example, expectations that a depression will occur in the next 10 years were tied to changes in statewide unemployment rates. A one-percentage-point increase in a state’s unemployment rate led to a 1.35-percentage-point increase in expectations of a forthcoming depression.
Rising stock prices caused respondents to anticipate that stock prices were less likely to rise in the future. (Sevak and Schmidt opined that this suggests respondents anticipate that a mean reversion process occurs with stock prices.)
The tendency to base forecasts on current conditions is described by behavioral scientists as recency bias. Recency bias can lead to financial mistakes, especially if one alters a portfolio based on forecasts tied to current events.
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