University of St.Gallen
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Subjective Expectations and Decision-Making

Kurzfassung Both theoretical and empirical economic analysis have long assumed that economic agents optimize their behavior by choosing the best action among the possible alternatives. When choice would require the knowledge of variables that are instead unknown to the decision-maker (because their values will be determined only after the decision-maker has made his/her decision), the standard procedure in economic analysis has been to assume that the decision-maker is able to form correct expectations about such variables. For example, an investor deciding whether to invest in stock A or stock B would be assumed to hold correct expectations regarding the future returns of stock A and stock B. The assumption that expectations are correct is often implausible and, if subjective expectations are not measured, also non-verifiable. This research project aims to fill that gap. We plan to develop experimental techniques to measure subjective expectations and to investigate the mechanisms by which subjective expectations influence choice behavior. Specifically, we plan to study, within a laboratory experimental setting, how individuals form, use and revise their beliefs about an uncertain environment when facing a decision problem, and how beliefs affect individual behavior and thus aggregate outcomes. An experimental economics approach to the study of the role of subjective expectations in decision-making is promising for several reasons. First, the experimental setting will allow a straightforward interpretation of treatment differences. Second, in contrast to psychological experiments, in which experiment participants receive a fixed remuneration, experiment participants in my study will receive a monetary remuneration based on their performance in the experiment. In this way, participants will be incentivized to take in fact the best decision. We plan to make several methodological contributions. First, we plan to investigate both first- and second-order subjective expectations. While first-order expectations are the beliefs, which a subject holds about the choices made by other agents, second-order expectations are the beliefs, which a subject holds regarding the beliefs that other agents in turn hold about his/her choice. The elicitation of second-order expectations allows studying strategic sophistication and consistency between beliefs and choices, as well as to cast light on the mechanism by which beliefs are formed and revised. Second, we will measure first and second-order beliefs probabilistically. By doing so, we will be able to examine key characteristics of the decision process that would otherwise be unobservable. To the best of our knowledge this research project represents the first attempt to shed light on the characteristics and role of probabilistic higher-order subjective expectations in decision-making. A better understanding of the role of subjective beliefs in decision-making is likely to impact many fields in the social sciences and to lead to new policy implications. An example is the study of trading decisions in financial markets, where subjective beliefs affect trading behavior, the aggregation of information, and the formation and burst of speculative bubbles.
Schlagwörter (Tags) decision-making, subjective expectations, beliefs, social learning, networks
Partner Charles Manski (Northwestern University)
Typ Grundlagenforschungsprojekt
Status laufend
Projektstart 2011
Projektende 2013
Auftraggeber Claudia Neri
Weitere Informationen
Themen Behavioral economics
Methoden Experimental
Profilbereich SEPS - Quantitative volkswirtschaftliche Methoden
Kontakt Claudia Neri