Expectations: This is how the future changes our present

15/10/2018

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How important are expectations?

“They may matter more than facts - Paolo Pellizzari, mathematician, professor at the Department of Economics and coordinator of the project for Ca’ Foscari, explains. Let me compare the external debt of two countries, Italy and the United States. The United States have the largest external debt in the world but nobody is expecting US citizens not to honor it, whereas there are a few reservations with regard to Italy because of the expectations carried with our economy.”

How can they be measured?

“It is a major challenge but we are attempting to reach this goal with a team of computational economists and cognitive psychologists. We use experiments, computational models and researches on social networks.”

What does your lab do?

“At the Center for Experimental Research in Management and Economics (CERME) we ask volunteers to face choices and we are trying to draw scientific conclusions from their behavior. In the Ex-SIDE project conducted by Frieder Neunhoeffer with professor Michele Bernasconi we are trying to understand how expectations are built asking participants to face concrete situations we selected in newspapers and to decide how to behave within that framework. This strong connection to reality makes the experience less abstract and brings out the participants’ real reasoning.”

One of the projects focuses on tax evasion. How can expectations influence tax revenue?

PhD candidate Fernando Garcia Alvarado is testing tax evasion models that include the latest evolution of tax compliance models. It was commonly believed that taxpayers decided whether or not to evade taxes based on the risk of being fined. This theory is not convincing for two reasons. We know that people are hardly ever caught. Since people usually get away with tax evasion, evasion should occur more often than registered. It seems more likely that evasion is determined by trust in the institutions. The belief in a virtuous use of tax revenues to provide quality services is an incentive for the taxpayer to avoid fraud”.

Do punishment policies not work?

“Let’s say that the role of trust helps us understand tax evasion dynamics. In our models we try to shift the weight of punishment policies and that of policies that may restaure trust, and see what occurs over time. For instance when a tax rate perceived as fair is established it may bolster trust and thus reduce tax evasion. Generally an open dialogue approach and transparent communication on how money is spent may help to fight against this phenomenon”.

These expectations therefore rely on rational aspects but also on emotions...

“Non-rational expectations seem to have the upper hand. To further explore these aspects two young researchers will join the ExSIDE team in Venice for a year: Chenghong Luo (Université Catholique de Louvain) whose research focuses on how social networks (e.g. friends or colleagues) may change our perception of the world, and Eva Levelt (Universitet van Amsterdam) who will use experiments to understand if models of expectation updates may produce stable or changing results (for instance when we tend to often change our mind on certain topics).”