On the Welfare Costs of Perceptions Biases

Abstract

AbstractAre households harmed by inaccurate inflation beliefs? This paper analyzes two established inflation perceptions biases and evaluates their welfare effects. Using French survey data I study the frequency bias, where households overweight goods that they purchase frequently, and the level bias, where households consistently overestimate current inflation. To evaluate the associated welfare losses, I incorporate biased inflation perceptions into a model with a nominal bond subject to inflation risk. Only the level bias significantly reduces welfare and asset accumulation. Removing the perception bias reduces the welfare loss, suggesting that inaccurate perceptions can harm households beyond affecting expectations.