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When Kahneman meets Manski: making sense of individual expectations on equity returns

  • Fabian Gouret

    ()

    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)

  • Guillaume Hollard

    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

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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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number hal-00633561.

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Date of creation: 2011
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Publication status: Published, Journal of Applied Econometrics, 2011, 26, 3, 371-392
Handle: RePEc:hal:cesptp:hal-00633561
Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00633561
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  1. Jeff Dominitz & Charles F. Manski, 1994. "Using Expectations Data to Study Subjective Income Expectations," Econometrics 9411003, EconWPA.
  2. Jeff Dominitz & Charles F. Manski, 2011. "Measuring and interpreting expectations of equity returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(3), pages 352-370, 04.
  3. M.C.J. van Rooij & A. Lusardi & R. Alessie, 2007. "Financial Literacy and Stock Market Participation," Working Papers 07-23, Utrecht School of Economics.
  4. Flachaire, Emmanuel & Hollard, Guillaume, 2008. "Individual sensitivity to framing effects," Journal of Economic Behavior & Organization, Elsevier, vol. 67(1), pages 296-307, July.
  5. Christelis, Dimitris & Jappelli, Tullio & Padula, Mario, 2010. "Cognitive abilities and portfolio choice," European Economic Review, Elsevier, vol. 54(1), pages 18-38, January.
  6. M. Hashem Pesaran & Martin Weale, 2005. "Survey Expectations," IEPR Working Papers 05.30, Institute of Economic Policy Research (IEPR).
  7. repec:use:tkiwps:2323 is not listed on IDEAS
  8. Dominitz, Jeff, 2001. "Estimation of income expectations models using expectations and realization data," Journal of Econometrics, Elsevier, vol. 102(2), pages 165-195, June.
  9. 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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