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

Tilman Drerup, Benjamin Enke and Hans-Martin von Gaudecker ()

Journal of Econometrics, 2017, vol. 200, issue 2, 378-389

Abstract: 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.

Keywords: Measurement error; Subjective expectations; Stock market participation (search for similar items in EconPapers)
JEL-codes: C35 C51 G11 (search for similar items in EconPapers)
Date: 2017
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Journal of Econometrics is currently edited by T. Amemiya, A. R. Gallant, J. F. Geweke, C. Hsiao and P. M. Robinson

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