ERC Starting Grant · 2025
Modes of Expectation Formation in Macro and Finance
Expectations are central in macroeconomics and finance. I propose to study modes of expectation formation in macro and finance: the ways in which expectations are constructed. These modes can differ in the inputs used and in how these inputs are processed. For instance, agents could consider relevant macroeconomic state variables and process this information through a developed mental model of the economy. A different approach could be based on spontaneous recall of easily accessible personal experiences and use of a simple heuristic. Empirical studies suggest that different modes are relevant, but we do not understand their relative importance, drivers, decision-relevance, and aggregate…
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