Premium
On Expectations Formation when Future Welfare is Contemplated
Author(s) -
RAVALLION MARTIN
Publication year - 1986
Publication title -
kyklos
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.766
H-Index - 58
eISSN - 1467-6435
pISSN - 0023-5962
DOI - 10.1111/j.1467-6435.1986.tb00678.x
Subject(s) - contemplation , ex ante , economics , rationality , preference , interpretation (philosophy) , welfare , consumption (sociology) , microeconomics , positive economics , epistemology , sociology , philosophy , macroeconomics , market economy , social science , linguistics
SUMMARY People often seem to gain present satisfaction from contemplating a favourable future. This paper examines the implications of such behaviour for expectations formation. Formally, satisfaction is said to be derived from ‘contemplation’ whenever ex post utility depends on expectations independently of their bearing on ex ante actions. Contemplation is shown to be necessary and sufficient for informationally biased forecasting in a model of the intertemporal consumption decision. Thus the MUTH‐rationality of expectations requires restrictions on the (derived) preference ordering over expectations and realizations which preclude contemplation. Bias tests of surveyed expectations are given a choice‐theoretic interpretation.