Expectations with Endogenous Information Acquisition: An Experimental Investigation

Abstract

Information frictions play an important role in many theories of expectation formation. We use a survey experiment to generate direct evidence on how people select, acquire and process information. Participants can buy different information signals that could help them forecast future national home prices. We elicit their willingness to pay for information, and introduce exogenous variation in the cost of information. We find that participants put substantial value on their preferred signal and, when acquired, incorporate the signal in their beliefs. However, they disagree on which signal to buy. As a result, making information cheaper does not decrease the cross-sectional dispersion of expectations. We further document that numeracy and the revealed "taste" for accurate expectations are important correlates of heterogeneity in all stages of the process. We provide a model with costly acquisition and processing of information, which can match most of our empirical results.

IQ, Expectations, and Choice

“…Other recent contributions studying the formation and updating of expectations and the relationship with economic behavior are Zafar (2011), who studies the formation of expectations by college students, Malmendier and Nagel (2016) and Kuchler and Zafar (2018), who study the effect of personal experiences on expectations about aggregate outcomes, Fuster, Perez-Truglia, Wiederholt, and Zafar (2018), who study how agents acquire and process information for national home price expectations, Coibion, Gorodnichenko, and Kumar (2018), who study how firms form inflation expectations,…”

Informative Social Interactions

“…30 Speci…cally, we consider a bivariate probit model for the choice to participate in the stock market and the choice to form a …nancial circle, allowing for correlated unobserved factors in ‡uencing the two choices. 31 We estimate the following bivariate probit econometric speci…cation:…”

IQ, Expectations, and Choice

“…They only survey elderly populations, they are run every two years, which makes studying the process of updating expectations over time difficult, and they only include questions about individual expectations such as retirement age and longevity. Observing macroeconomic expectations is crucial to understanding whether any effects of limited cognition might 1 See also Landier, Ma, and Thesmar (2018), , Gennaioli, Ma, and Shleifer (2018), Armantier, Bruine de Bruin, Topa, Klaauw, and Zafar (2015), Crump, Eusepi, Tambalotti, and Topa (2018), Bachmann, Berg, and Sims (2015), Glaeser and Nathanson (2017), Fuster, Perez-Truglia, Wiederholt, and Zafar (2018), Malmendier and Nagel (2016), Roth and Wohlfart (2018), D 'Acunto, Hoang, and Weber (2019), Das, Kuhnen, and Nagel (2017), D 'Acunto, Malmendier, Ospina, and Weber (2019), D 'Acunto, Malmendier, and Weber (2019), Fuster, Kaplan, and Zafar (2018), Andre, Pizzinelli, Roth, and Wohlfart (2019), Vellekoop and Wiederholt (2017), and Ben-David, Fermand, Kuhnen, and Li (2018). matter for aggregate outcomes and for the effectiveness of policies that operate through managing such expectations.…”

“…Other recent contributions studying the formation and updating of expectations and the relationship with economic behavior are Zafar (2011), who studies the formation of expectations by college students, Malmendier and Nagel (2016) and Kuchler and Zafar (2018), who study the effect of personal experiences on expectations about aggregate outcomes, Fuster, Perez-Truglia, Wiederholt, and Zafar (2018), who study how agents acquire and process information for national home price expectations, Coibion, Gorodnichenko, and Kumar (2018), who study how firms form inflation expectations, Bachmann et al (2015), who are the first to study the consumer Euler equation at the micro level, Crump et al (2018)…”