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Can subjective expectations data be used in choice models? evidence on cognitive biases

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  • Basit Zafar

Abstract

A pervasive concern with the use of subjective data in choice models is that the data are biased and endogenous. This paper examines the extent to which cognitive biases plague subjective data, specifically addressing 1) whether cognitive dissonance affects the reporting of beliefs, and 2) whether individuals exert sufficient mental effort when probed about their subjective beliefs. For this purpose, I collect a unique panel data set of Northwestern University undergraduates that contains their subjective expectations about outcomes specific to different majors in their choice set. I do not find evidence of cognitive biases systematically affecting the reporting of beliefs: By analyzing patterns of belief updating, I can rule out cognitive dissonance being a serious concern in the current setting. Moreover, there seems to be no systematic (nonclassical) measurement error in the reporting of beliefs. In the reported beliefs for the various majors, I find no systematic patterns in mental recall of previous responses or in the extent of rounding. Comparison of subjective beliefs with objective measures suggests that students have well-formed expectations. Overall, the results paint a favorable picture for the use of subjective expectations data in choice models.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 26 (2011)
Issue (Month): 3 (04)
Pages: 520-544

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Handle: RePEc:wly:japmet:v:26:y:2011:i:3:p:520-544

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  1. Muriel Niederle & Lise Vesterlund, 2005. "Do Women Shy Away From Competition? Do Men Compete Too Much?," NBER Working Papers 11474, National Bureau of Economic Research, Inc.
  2. Adeline Delavande, 2008. "Pill, Patch, Or Shot? Subjective Expectations And Birth Control Choice," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(3), pages 999-1042, 08.
  3. Offerman, Theo & Sonnemans, Joep & Schram, Arthur, 1996. "Value Orientations, Expectations and Voluntary Contributions in Public Goods," Economic Journal, Royal Economic Society, vol. 106(437), pages 817-45, July.
  4. Arcidiacono, Peter, 2004. "Ability sorting and the returns to college major," Journal of Econometrics, Elsevier, vol. 121(1-2), pages 343-375.
  5. Hugo Ben�tez-Silva & Moshe Buchinsky & Hiu Man Chan & Sofia Cheidvasser & John Rust, 2004. "How large is the bias in self-reported disability?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(6), pages 649-670.
  6. Basit Zafar, 2013. "College Major Choice and the Gender Gap," Journal of Human Resources, University of Wisconsin Press, vol. 48(3), pages 545-595.
  7. Lance Lochner, 2003. "Individual Perceptions of the Criminal Justice System," NBER Working Papers 9474, National Bureau of Economic Research, Inc.
  8. Moshe Buchinsky & Phillip Leslie, 2010. "Educational Attainment and the Changing U.S. Wage Structure: Dynamic Implications on Young Individuals' Choices," Journal of Labor Economics, University of Chicago Press, vol. 28(3), pages 541-594, 07.
  9. Todd Stinebrickner & Ralph Stinebrickner, 2012. "Learning about Academic Ability and the College Dropout Decision," Journal of Labor Economics, University of Chicago Press, vol. 30(4), pages 707 - 748.
  10. Dean R. Hyslop & Guido W. Imbens, 2000. "Bias from Classical and Other Forms of Measurement Error," NBER Technical Working Papers 0257, National Bureau of Economic Research, Inc.
  11. Charles Bellemare & Sabine Kröger & Arthur van Soest, 2008. "Measuring Inequity Aversion in a Heterogeneous Population Using Experimental Decisions and Subjective Probabilities," Econometrica, Econometric Society, vol. 76(4), pages 815-839, 07.
  12. Charles F. Manski & Elie Tamer, 2002. "Inference on Regressions with Interval Data on a Regressor or Outcome," Econometrica, Econometric Society, vol. 70(2), pages 519-546, March.
  13. Delavande, Adeline & Giné, Xavier & McKenzie, David, 2011. "Measuring subjective expectations in developing countries: A critical review and new evidence," Journal of Development Economics, Elsevier, vol. 94(2), pages 151-163, March.
  14. Manski, Charles F. & Molinari, Francesca, 2010. "Rounding Probabilistic Expectations in Surveys," Journal of Business & Economic Statistics, American Statistical Association, vol. 28(2), pages 219-231.
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Cited by:
  1. Isabel Busom & Beatriz Corchuelo & Ester Martínez-Ros, 2011. "Tax incentives and direct support for R&D : what do firms use and why?," Business Economics Working Papers id-11-03, Universidad Carlos III, Instituto sobre Desarrollo Empresarial "Carmen Vidal Ballester".
  2. de Bresser, Jochem & van Soest, Arthur, 2013. "Survey response in probabilistic questions and its impact on inference," Journal of Economic Behavior & Organization, Elsevier, vol. 96(C), pages 65-84.
  3. Basit Zafar, 2010. "Double majors: one for me, one for the parents?," Staff Reports 478, Federal Reserve Bank of New York.
  4. Pamela Giustinelli, 2011. "Group Decision Making with Uncertain Outcomes: Unpacking Child-Parent Choices of High School Tracks," Working Papers 2011-030, Human Capital and Economic Opportunity Working Group.
  5. Bresser, J.R. de, 2013. "Between goals and expectations. Essays on pensions and retirement," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5930485, Tilburg University.

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