When Kahneman meets Manski: Using dual systems of reasoning to interpret subjective expectations of equity returns
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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Volume (Year): 26 (2011)
Issue (Month): 3 (04)
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References listed on IDEAS
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- Jeff Dominitz & Charles F. Manski, 2007. "Expected Equity Returns and Portfolio Choice: Evidence from the Health and Retirement Study," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 369-379, 04-05.
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CSEF Working Papers
157, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
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- Emmanuel Flachaire & Guillaume Hollard, 2008.
"Individual sensitivity to framing effects,"
Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers)
- Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, vol. 93(5), pages 1449-1475, December.
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