The precision of subjective data and the explanatory power of economic models

Subjective expectations are important primitives in many economic models, yet their direct measurement often yields imprecise and inconsistent data. This has previously been treated as a pure measurement error problem. In contrast, this paper argues that the individual-level precision of such data m...

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Bibliographic Details
Published in:Journal of econometrics 2017-10, Vol.200 (2), p.378-389
Main Authors: Drerup, Tilman, Enke, Benjamin, von Gaudecker, Hans-Martin
Format: Article
Language:English
Subjects:
Measurement error
Stock market participation
Subjective expectations
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Summary:Subjective expectations are important primitives in many economic models, yet their direct measurement often yields imprecise and inconsistent data. This has previously been treated as a pure measurement error problem. In contrast, this paper argues that the individual-level precision of such data may reflect the structure of the underlying decision process. We estimate a semiparametric double index model on data specifically collected for this purpose and show that stock market participation decisions exhibit little variation in economic model primitives when individuals provide error-ridden belief statements. In contrast, beliefs and risk preferences predict strong variation in stock market participation for individuals who report precise expectations measures.
ISSN:0304-4076
1872-6895
DOI:10.1016/j.jeconom.2017.06.017