Learning your own ability

Abstract

Families’ human capital investments depend on beliefs about their children’s performance. I build a dynamic model of expectation formation to show how agents use both observable and unobservable information to predict their school scores. The model shows parents and students have substantial knowledge of unobservable factors affecting their performance, especially in middle and high school. Families are overconfident towards expecting higher grades and expectation formation differs by race. Families’ ability to predict future scores improved substantially during middle school due to several factors: lower bias and variance of the prediction errors, and a better use of past scores as predictors.