Expectations with Endogenous Information Acquisition: An Experimental Investigation

47 Pages Posted: 6 Jul 2018

See all articles by Andreas Fuster

Andreas Fuster

Swiss National Bank - Financial Stability

Ricardo Perez-Truglia

University of California, Berkeley; National Bureau of Economic Research (NBER)

Basit Zafar

Arizona State University (ASU) - Department of Economics

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Date Written: June 2018

Abstract

Information frictions play an important role in many theories of expectation formation. We use a survey experiment to generate direct evidence on how people select, acquire and process information. Participants can buy different information signals that could help them forecast future national home prices. We elicit their willingness to pay for information, and introduce exogenous variation in the cost of information. We find that participants put substantial value on their preferred signal and, when acquired, incorporate the signal in their beliefs. However, they disagree on which signal to buy. As a result, making information cheaper does not decrease the cross-sectional dispersion of expectations. We further document that numeracy and the revealed “taste” for accurate expectations are important correlates of heterogeneity in all stages of the process. We provide a model with costly acquisition and processing of information, which can match most of our empirical results.

Suggested Citation

Fuster, Andreas and Perez-Truglia, Ricardo and Zafar, Basit, Expectations with Endogenous Information Acquisition: An Experimental Investigation (June 2018). NBER Working Paper No. w24767, Available at SSRN: https://ssrn.com/abstract=3206442

Andreas Fuster (Contact Author)

Swiss National Bank - Financial Stability ( email )

Boersenstrasse 15
Zurich, CH-8022
Switzerland

Ricardo Perez-Truglia

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Basit Zafar

Arizona State University (ASU) - Department of Economics ( email )

AZ
United States

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