Special Issue Article on ‘Measurement and Analysis of Subjective Expectations’
Can subjective expectations data be used in choice models? evidence on cognitive biases
Article first published online: 23 MAR 2011
Copyright © 2011 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Special Issue: Measurement and Analysis of Subjective Expectations
Volume 26, Issue 3, pages 520–544, April/May 2011
How to Cite
Zafar, B. (2011), Can subjective expectations data be used in choice models? evidence on cognitive biases. J. Appl. Econ., 26: 520–544. doi: 10.1002/jae.1236
- Issue published online: 23 MAR 2011
- Article first published online: 23 MAR 2011
A pervasive concern with the use of subjective data in choice models is that they are biased and endogenous. This paper examines the extent to which cognitive biases plague subjective data, and specifically addresses the questions of: (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 dataset of Northwestern University undergraduates which contains their subjective expectations about major-specific outcomes for their chosen major as well as for other alternatives 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 of serious concern in the current setting. There does not seem to be any systematic (non-classical) measurement error in the reporting of beliefs: I do not find systematic patterns in mental recall of previous responses, or in the extent of rounding in the reported beliefs for the various majors. 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. Copyright © 2011 John Wiley & Sons, Ltd.