"Note also that the adverse effects of stakes and hedging are not specific to PSRs and also apply to other incentivized belief elicitation techniques such as the standard lottery mechanism (Kadane and Winkler, 1988), the direct revelation mechanism recently proposed by Karni (2009), or the various " truth serums " documented in Trautmann and van de Kuilen (2011). In fact, Karni and Safra (1995) show that unbiased belief elicitation based on marginal rates of substitution is impossible when stakes are not observed by the experimenter. This impossibility result holds even if the utility function is observable and even if several experiments can be implemented. "
[Show abstract] [Hide abstract] ABSTRACT: We report on two experiments challenging the common assumption that events with objective probabilities constitute a unique source of uncertainty. We find that, similar to the domain of ambiguity, the domain of risk is rich in the sense that behavior is systematically different when subjects face risky bets based on simple or more complex events. Furthermore, we find a tight association between attitudes toward complex risky bets and attitudes toward both ambiguity and compound lotteries. These results raise questions about the characterization of ambiguity aversion and the modeling of decisions under uncertainty.
"This is because proper scoring rules may generate biases when respondents are not risk neutral (Winkler and Murphy, 1970). Moreover, incentivized belief elicitation techniques are not incentive-compatible when the respondent has a stake in the event that they are predicting (Karni and Safra, 1995), which is the case for inflation expectations. In addition, Armantier and Treich (2011) show that elicited beliefs are less biased (but noisier) in the absence of incentives. "
[Show abstract] [Hide abstract] ABSTRACT: Understanding the formation of consumer inflation expectations is considered crucial for managing monetary policy. Using a unique 'information' experiment embedded in a survey, this paper investigates how consumers’ inflation expectations respond to new information. We elicit respondents’ expectations for future inflation before and after providing a random subset of respondents with factual information that may affect their expectations. This design creates unique panel data that allow us to identify causal effects of new information. We find, first, that baseline inflation expectations are right-skewed, and that consumers in the high-expectation right tail are relatively under-informed about objective, inflation-relevant facts. We next find that providing consumers with new information causes them to update their expectations, such that the expectations distribution converges toward its center. Furthermore, respondents who update do so in sensible ways: revisions are proportional to the strength of the information signal, and inversely proportional to the precision of baseline inflation expectations. Our findings indicate that heterogeneous consumer expectations are a result of both different information sets, as well as different information-processing rules. Overall, our results are consistent with a Bayesian learning model. We discuss implications of these results for monetary policy and for macro-economic modeling.
"Indeed, the respondents' wealth is likely to depend on future inflation, which creates a stake in the event predicted. As shown by (e.g.) Karni and Safra (1995), incentivized beliefs elicitation techniques are only incentive compatible when the respondent has no stake in the event predicted (the so called " no stake " condition). "
[Show abstract] [Hide abstract] ABSTRACT: We compare the inflation expectations reported by consumers in a survey with their behavior in a financially incentivized investment experiment designed such that future inflation affects payoffs. The inflation expectations survey is found to be informative in the sense that the beliefs reported by the respondents are correlated with their choices in the experiment. Furthermore, most respondents appear to act on their inflation expectations showing patterns consistent (both in direction and magnitude) with expected utility theory. Respondents whose behavior cannot be rationalized tend to be less educated and to score lower on a numeracy and financial literacy scale. These findings are therefore the first to provide support to the microfoundations of modern macroeconomic models.
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