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Subjective Expectations, Belief Formation, and Economic Behavior

Paper Session

Friday, Jan. 5, 2018 8:00 AM - 10:00 AM

Marriott Philadelphia Downtown, Grand Ballroom Salon L
Hosted By: American Economic Association
  • Chair: Michael Haliassos, Goethe University Frankfurt

SeaTE: Subjective ex ante Treatment Effect of Health on Retirement

Pamela Giustinelli
,
Bocconi University
Matthew Shapiro
,
University of Michigan

Abstract

How does a treatment, such as poor health, affect a behavior, such as retirement? In behavioral data, by which we mean realized outcomes or decisions of economic agents, the econometrician observes only the behavior conditional on the treatment, but not the counterfactual behavior absent the treatment. When there is unobserved heterogeneity across individuals, this inherent feature of behavioral data makes difficult inferences about causal effects. Rather than relying on behavioral data, the paper uses subjective expectations of a behavior or outcomes conditional on values of the treatment to elicit ex ante treatment effects. This strategy allows each individual to be both treatment and control, thereby obviating the unobserved counterfactual problem and allowing for unrestricted heterogeneity across individuals. This approach yields an individual-level estimate of the treatment effect that we call the Subjective ex ante Treatment Effect, or SeaTE for short. Thus, this paper provides a strategy for quantifying person-specific treatment effects and for characterizing the distribution of causal effects across the population.

We implement our approach by asking older workers participating in the Vanguard Research Initiative (VRI) to report the conditional likelihood, on a 0-100 percent chance scale that they will be working to specified horizons under alternative health scenarios. They also report their unconditional likelihoods of working to those horizons and of experiencing those health states. Using these data we generate individual and aggregate level estimates of the Subjective ex ante Treatment Effect (SeaTE) of health on retirement age, given by the difference between respondents’ likelihoods of working in low versus high health. We interpret that the SeaTE in a dynamic programming framework, and estimate a simple structural econometric model of health and retirement combining the conditional probability measures with this theoretical framework.

The Subjective ex ante Treatment Effect (SeaTE) of health on retirement is zero for almost 30% of working respondents aged 57 and higher at both 2 and 4 year horizons. The remaining 70% reports have a strictly negative SeaTE (median of -40% and standard deviation of 24% percent for the 2-year horizon; median of -30% and standard deviation of 25% percent for the 4-year horizon). The structural model implies that moving from high to low health has a large, negative effect on the mean value of continued work, but the within-person correlation of this value is high.

Informative Social Interactions

Luc Arrondel
,
Paris School of Economics
Hector Calvo-Pardo
,
University of Southampton
Chryssi Giannitsarou
,
University of Cambridge
Michael Haliassos
,
Goethe University Frankfurt

Abstract

We design, field and exploit novel survey data, from a representative sample of the French population in December 2014 and May 2015 to provide insights on whether social interactions are informative for households’ financial decisions. In particular, we examine the extent to which peers with whom respondents discuss financial matters are themselves informed about or participate in the stock market, and whether they encourage mindless imitation of perceived stock market participation. We provide a model in which purely informative social interactions influence both subjective expectations of future stock market returns and directly demand for investing in stocks, and find strong support for the presence of informative social interactions. How much a respondent’s financial circle is informed about or participates in stockholding appears to influence perceptions of recent stock returns and, through them, expectations of future returns. Controlling for subjective expectations, both stock market participation and the conditional portfolio share are positively influenced by the extent to which the financial circle of a respondent is informed about or participating in the stock market. Alongside the informative social interactions of respondents with their financial circle, we also find some evidence of mindless imitation of stock market participation via their outer social circle. Our findings suggest that informative social interactions are significant and create a social multiplier for financial education and information, even though the potential for mindless imitation is also present.

Demand for Macroeconomic Data: Evidence from an Information-Acquisition Experiment

Andreas Fuster
,
Federal Reserve Bank of New York
Ricardo Perez-Truglia
,
University of California-Los Angeles
Basit Zafar
,
Federal Reserve Bank of New York

Abstract

Information frictions—either in the form of costly information acquisition or constraints in information processing—are believed to play an important role in consumers' formation of macroeconomic expectations. However, there is little direct empirical evidence about the causes and consequences of information acquisition. We conduct a survey experiment to study this question in the context of house price expectations. We let consumers buy different pieces of information that could be relevant for the formation of their expectation about the future median national home price. For this purpose, we use an incentive-compatible mechanism to elicit their maximum willingness to pay. In addition, we introduce exogenous variation in the value of information by randomly assigning individuals to rewards for the ex-post accuracy of their expectations. This setup generates several testable hypotheses. Consistent with rational inattention, individuals are willing to pay more for information when they stand to gain more from it. However, underscoring the importance of limits on information processing capacity, individuals disagree on which signal they prefer to buy. Less sophisticated individuals—those with lower education and financial numeracy—are less likely to demand information that has ex-ante higher predictive power, and this gap is not ameliorated when the stakes are higher. As a result, and in contrast to models of optimal information processing, random information provision or lowering of search costs does not decrease the cross-sectional dispersion of expectations. Our findings have implications for models of expectation information and for the design of information interventions.

Overreaction in Macroeconomic Expectations

Pedro Bordalo
,
University of Oxford
Nicola Gennaioli
,
Bocconi University
Yueran Ma
,
Harvard University
Andrei Shleifer
,
Harvard University

Abstract

We examine the rationality of individual and consensus professional forecasts of macroeconomic and financial variables using the methodology of Coibion and Gorodnichenko (2015), which focuses on the predictability of forecast errors from earlier forecast revisions. We document two principal findings: at the individual level, forecasters typically over-react to information, while consensus forecasts exhibit under-reaction. To reconcile these findings, we combine the diagnostic expectations model of belief formation from Bordalo, Gennaioli, and Shleifer (2018) with Woodford’s (2003) noisy information model of belief aggregation. The model accounts for the findings, but also yields a number of new implications related to the forward looking nature of diagnostic expectations, which we also test and confirm. Finally, we compare our model to mechanical extrapolation, rational inattention, and natural expectations.
Discussant(s)
Wilbert van der Klaauw
,
Federal Reserve Bank of New York
Giorgio Topa
,
Federal Reserve Bank of New York
Christopher Carroll
,
Johns Hopkins University
Yuriy Gorodnichenko
,
University of California-Berkeley
JEL Classifications
  • D8 - Information, Knowledge, and Uncertainty
  • E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy