Measurement Error in Subjective Expectations and the Empirical Content of Economic Models

Tilman Drerup (), Benjamin Enke and Hans-Martin von Gaudecker
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Tilman Drerup: University of Bonn

No 8535, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: While stock market expectations are among the most important primitives of portfolio choice models, their measurement has proved challenging for some respondents. We argue that the magnitude of measurement error in subjective expectations can be used as an indicator of the degree to which economic models of portfolio choice provide an adequate representation of individual decision processes. In order to explore this conjecture empirically, we estimate a semiparametric double index model on a dataset specifically collected for this purpose. Stock market participation reacts strongly to changes in model parameters for respondents at the lower end of the measurement error distribution; these effects are much less pronounced for individuals at the upper end. Our findings indicate that measurement error in subjective expectations provides useful information to uncover heterogeneity in choice behavior.

Keywords: stock market participation; subjective expectations; measurement error (search for similar items in EconPapers)
JEL-codes: C35 C51 G11 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2014-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published - published as: 'The precision of subjective data and the explanatory power of economic models' in: Journal of Econometrics , 2017, 200 (2), 378-389

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Related works:
Working Paper: Measurement Error in Subjective Expectations and the Empirical Content of Economic Models (2015)
Working Paper: Measurement Error in Subjective Expectation and the Empirical Content of Economic Models (2014)
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