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When Kahneman meets Manski: Using dual systems of reasoning to interpret subjective expectations of equity returns

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  • Fabian Gouret
  • Guillaume Hollard

Abstract

To understand how decisions to invest in stocks are taken, economists need to elicit expectations relative to expected risk-return trade-off. One of the few surveys which have included such questions is the Survey of Economic Expectations in 1999-2001. Using this survey, Dominitz and Manski find an important heterogeneity across respondents that can hardly be accounted for by simple models of expectations formation. This paper claims that much of the heterogeneity derives from pathologies affecting respondents. Adapting a principle of dual-reasoning borrowed from Kahneman, we classify respondents according to their sensitivity to these pathologies, and find a strong homogeneity across the less sensitive respondents. We then sketch a model of expectation formation.
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Suggested Citation

  • Fabian Gouret & Guillaume Hollard, 2011. "When Kahneman meets Manski: Using dual systems of reasoning to interpret subjective expectations of equity returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(3), pages 371-392, April.
    • Handle: RePEc:wly:japmet:v:26:y:2011:i:3:p:371-392
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    Cited by:

    1. Gric, Zuzana & Ehrenbergerova, Dominika & Hodula, Martin, 2022. "The power of sentiment: Irrational beliefs of households and consumer loan dynamics," Journal of Financial Stability, Elsevier, vol. 59(C).
    2. Díaz Serrano, Lluís, 2017. "The Reliability of Students’ Earnings Expectations," Working Papers 2072/290760, Universitat Rovira i Virgili, Department of Economics.
    3. Charles F. Manski, 2018. "Survey Measurement of Probabilistic Macroeconomic Expectations: Progress and Promise," NBER Macroeconomics Annual, University of Chicago Press, vol. 32(1), pages 411-471.
    4. Fabian Gouret, 2017. "What can we learn from the fifties?," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 36(7), pages 756-775, November.
    5. repec:isu:genstf:201701010800006248 is not listed on IDEAS
    6. Ewa Stanisławska, 2018. "Czy pytając konsumentów o wartość przewidywanej inflacji, można uzyskać wiarygodne i użyteczne informacje?," Bank i Kredyt, Narodowy Bank Polski, vol. 49(5), pages 515-556.
    7. Teresa Bago d'Uva & Esen Erdogan Ciftci & Owen O'Donnell & Eddy van Doorslaer, 2015. "Who can predict their Own Demise? Accuracy of Longevity Expectations by Education and Cognition," Tinbergen Institute Discussion Papers 15-052/V, Tinbergen Institute.
    8. Agarwal, Sandip & Jacobs, Keri L. & Weninger, Quinn, 2016. "Elicitation of Subjective Beliefs: A Pilot study of farmers' nitrogen management decision-making in Central Iowa," ISU General Staff Papers 201601010800001005, Iowa State University, Department of Economics.
    9. Oscar Stålnacke, 2019. "Individual investors’ information use, subjective expectations, and portfolio risk and return," The European Journal of Finance, Taylor & Francis Journals, vol. 25(15), pages 1351-1376, October.
    10. Hans-Martin von Gaudecker & Axel Wogrolly, 2019. "The Dynamics of Households' Stock Market Beliefs," CRC TR 224 Discussion Paper Series crctr224_2019_079, University of Bonn and University of Mannheim, Germany.
    11. Olympia Bover, 2016. "Erratum to: Measuring expectations from household surveys: new results on subjective probabilities of future house prices," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 7(2), pages 279-279, June.
    12. Markus Eyting & Patrick Schmidt, 2019. "Belief Elicitation with Multiple Point Predictions," Working Papers 1818, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 16 Nov 2020.
    13. Maurizio Bovi, 2014. "Shocks and the Expectations Formation Process. A Tale of Two Expectations," Natural Field Experiments 00390, The Field Experiments Website.
    14. Eyting, Markus & Schmidt, Patrick, 2021. "Belief elicitation with multiple point predictions," European Economic Review, Elsevier, vol. 135(C).
    15. Binswanger, Johannes & Salm, Martin, 2013. "Does Everyone Use Probabilities? Intuitive and Rational Decisions about Stockholding," IZA Discussion Papers 7265, Institute of Labor Economics (IZA).
    16. Filip Premik & Ewa Stanisławska, 2017. "The Impact of Inflation Expectations on Polish Consumers’ Spending and Saving," Eastern European Economics, Taylor & Francis Journals, vol. 55(1), pages 3-28, January.
    17. van Santen, Peter & Alessie, Rob & Kalwij, Adriaan, 2012. "Probabilistic survey questions and incorrect answers: Retirement income replacement rates," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 267-280.
    18. Diaz-Serrano, Luis & Nilsson, William, 2022. "The reliability of students’ earnings expectations," Labour Economics, Elsevier, vol. 76(C).
    19. Paiella, Monica, 2016. "Financial literacy and subjective expectations questions: A validation exercise," Research in Economics, Elsevier, vol. 70(2), pages 360-374.
    20. Justin T. Pickett & Thomas A. Loughran & Shawn Bushway, 2015. "On the Measurement and Properties of Ambiguity in Probabilistic Expectations," Sociological Methods & Research, , vol. 44(4), pages 636-676, November.
    21. Joachim Winter & Amelie Wuppermann, 2014. "Do They Know What Is At Risk? Health Risk Perception Among The Obese," Health Economics, John Wiley & Sons, Ltd., vol. 23(5), pages 564-585, May.

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