Measurement Error in Subjective Expectations and the Empirical Content of Economic Models
28 Pages Posted: 21 Oct 2014
Date Written: October 2, 2014
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: Measurement Error, Subjective Expectations, Stock Market Participation
JEL Classification: C35, C51, G11
Suggested Citation: Suggested Citation