Scientific Research Project Title

The “Beliefs Lab”: Understanding the Evolution and Impact of Beliefs on the Economy

Research Institution

Copenhagen Business School Handelshøjskolen

Copenhagen Business School

Research field

Behavioral Economics

Research leader

Luigi Butera

Assistant Professor

Project title

The “Beliefs Lab”: Understanding the Evolution and Impact of Beliefs on the Economy

What is your project about?

People’s expectations about their own professional and personal future, about the economy, and about government policy, are key channels affecting individual decisions and nations’ welfare.   Unfortunately, we lack the tools to carefully measure, at a sufficiently large-scale, how people’s expectations about the future form and evolve, how they influence people’s actual experienced economic outcomes, and how they shape the effectiveness of government action.  Because of this lack of data, economic analysis is often left with assuming that people have rational expectations, meaning that people can always properly use all the information available to make sensible predictions about the future. This approach, however, contrasts with growing evidence from behavioral economics and psychology suggesting that people often misuse or ignore information, and often make systematic mistakes.  The goal of this project is to reconcile current macroeconomics and policy practices with insights from behavioral science: we will do so by generating large-scale evidence about people’s expectations of the future, by combining this data with the actual outcomes over which expectations are elicited, and by providing causal evidence about the role of information on expectations and economic decisions. More precisely, we will administer a monthly panel survey to a large representative sample of the Danish population in which we will elicit expectations about future personal and macroeconomic outcomes. Then, we will combine this survey data with administrative data from the Danish registry. This will allow us to map expectations into people’s actual economic outcomes, both future and past. Such a comparison between expected and realized outcomes is unique to this project and has not been feasible in other state-of-art surveys. Finally, we will conduct simple information-provision experiments within the surveys to study how receiving information about recent policies or macroeconomic events causally affects expectations and behavior.

How did you become interested in your particular field of research?

Growing up in a family of psychologists and sociologists, I have always been fascinated by how our beliefs and our social environment influence our decisions. Studying economics, and particularly behavioral economics, opened my eyes on how we can combine economic theory, insights from social sciences, and rigorous scientific methods to uncover empirical regularities in the way information, expectations, incentives, and emotions affect our decisions.

What are the scientific challenges and perspectives in your project?

Understanding how people form expectations has fundamental consequences for the way we design our policies and study our economy. If people can take full advantage of all information available to make sensible predictions about the future, then on average they will make good decisions, and new policies will work as intended.  But if some people are overconfident, are unduly influenced by their past experiences, or ignore some information, then they will make systematic mistakes, which means that they will be systematically unprepared when negative shocks hit.   This project will contribute to a number of fundamental questions in Economics.  First, the possibility to match expectations with actual outcomes at the individual level, will allow us to shed light on two key questions: Are people’s expectations systematically influenced by their past outcomes? And are people systematically over-optimistic in their expectations about their personal future? Second, during the time of our study, many respondents will experience changes in a number of life domains (e.g., labor, health, finance, wealth, family, etc.), and new policies and regulations will be put in place.  The natural variation observed in the Danish register data, combined with our survey data on expectations, will allow us to answer more questions such as: Do people underestimate the variability of future shocks? Are people attentive to and understand the conduct of new policies? Do people have good understanding of the impact of policies? And do expectations reflect into actual decisions?  Finally, we will run experiments. In some survey waves, we will randomly provide some respondents, but not others, with information – for instance about recent policies or macroeconomic changes – and observe the effect of information on expectations and behavior. We will thus contribute to an important literature asking: Are people attentive to information? And can information alone affect behavior?

What is your estimate of the impact, which your project may have to society in the long term?

Equality in opportunities is a necessary condition for guaranteeing fair and equal outcomes across civil society. Yet, it appears it is far from sufficient. Even when the welfare state guarantees universally available opportunities, more advantaged individuals seem to be better equipped in converting inputs into output. One factor that could dampen the equalizing role of public policy is citizens’ expectations: Citizen’s life experience and socioeconomic environment may to a very large extent affect their expectations about how they can influence their own outcomes, preventing some from seizing opportunities and reaching full potential. This project will provide much needed evidence on the role of expectations for an economy, potentially uncovering important heterogeneity in expectations and information processing, which would inform on how to design policies to internalize behavioral frictions.

Which impact do you expect the Sapere Aude programme will have on your career as a researcher?

The Sapere Aude programme will allow me to establish an international network of world leading economists with diverse expertise, providing key contributions to the emerging field of behavioral macroeconomics. The programme will allow to lay the foundations for a long-term “living lab” for studying the role of expectations for the economy.

Background and personal life

I live in beautiful Copenhagen with my partner. When I am not working, I enjoy reading, traveling, boxing, and mixing music. Oh, and cooking, of course!  I have recently co-founded the Institute for Behavioral Economics at Copenhagen Business School and the University of Chicago: an international research and outreach institution that connects organizations interested in using economic science to address their most compelling business questions, and economists interested in generating and publishing new scientific insights while scientifically testing new ideas to organizations’ challenges.

City of your current residence

Copenhagen

High school

Liceo Classico C. Beccaria - Milano (Italy)