Can Subjective Expectations Data be Used in Choice Models? Evidence on Cognitive Biases

34 Pages Posted: 21 Jun 2010

Date Written: June 1, 2010

Abstract

A pervasive concern with the use of subjective data in choice models is that the data are biased and endogenous. This paper examines the extent to which cognitive biases plague subjective data, specifically addressing 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 data set of Northwestern University undergraduates that contains their subjective expectations about outcomes specific to different majors 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 a serious concern in the current setting. Moreover, there seems to be no systematic (nonclassical) measurement error in the reporting of beliefs. In the reported beliefs for the various majors, I find no systematic patterns in mental recall of previous responses or in the extent of rounding. 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.

Keywords: College Majors, Expectations, Cognitive Biases, Endogeneity, Dissonance

JEL Classification: D8, I2, J1, J7

Suggested Citation

Zafar, Basit, Can Subjective Expectations Data be Used in Choice Models? Evidence on Cognitive Biases (June 1, 2010). FRB of New York Staff Report No. 454, Available at SSRN: https://ssrn.com/abstract=1628169 or http://dx.doi.org/10.2139/ssrn.1628169

Basit Zafar (Contact Author)

Arizona State University ( email )

WP Carey School of Business, ASU
Tempe, AZ 85287
United States
9179326564 (Phone)

HOME PAGE: http://https://sites.google.com/site/basitakzafar/

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