Financial Expectations, Consumption and Saving: A Microeconomic Analysis

We explore the determinants of individuals´ financial expectations using data from the British Household Panel Survey (BHPS) 1991-2001. Our findings suggest that individuals´ financial predictions are influenced by both the life cycle and the business cycle. We also investigate the extent to which the accuracy of past financial expectations affects current financial expectations. Interestingly, only past financial optimism matters, regardless of the accuracy of the prediction. We also explore the relationship between financial realisations and expectations and we find that expectations tend to fall short of financial realisations. Finally, we investigate the relationship between financial expectations, savings and consumption. Our findings suggest that financial optimism is inversely associated with savings and that current financial expectations serve to predict future consumption.