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The precision of subjective data and the explanatory power of economic models
- Drerup, Tilman, Enke, Benjamin, von Gaudecker, Hans-Martin
- Journal of econometrics 2017 v.200 no.2 pp. 378-389
- econometric models, economic analysis, economic theory, risk, stock exchange
- 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.