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

29 Pages Posted: 18 Nov 2014

See all articles by Tilman H. Drerup

Tilman H. Drerup

University of Bonn

Benjamin Enke

Harvard University

Hans-Martin von Gaudecker

University of Bonn - Economic Science Area; Netspar; Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA)

Multiple version iconThere are 4 versions of this paper

Date Written: October 2, 2014

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: Measurement Error, Subjective Expectations, Stock Market Participation

JEL Classification: C35, C51, G11

Suggested Citation

Drerup, Tilman H. and Enke, Benjamin and von Gaudecker, Hans-Martin, Measurement Error in Subjective Expectations and the Empirical Content of Economic Models (October 2, 2014). Max Planck Institute for Social Law and Social Policy Discussion Paper No. 14-2014. Available at SSRN: https://ssrn.com/abstract=2526707 or http://dx.doi.org/10.2139/ssrn.2526707

Tilman H. Drerup (Contact Author)

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

Benjamin Enke

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Hans-Martin Von Gaudecker

University of Bonn - Economic Science Area ( email )

Adenauerallee 24-42
D-53113 Bonn
Germany

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA) ( email )

Amalienstrasse 33
Munich, 80799
Germany

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