When Kahneman meets Manski: Using dual systems of reasoning to interpret subjective expectations of equity returns

Fabian Gouret (1) , Guillaume Hollard (2, 3)

1 THEMA - Théorie économique, modélisation et applications
2 CES - Centre d'économie de la Sorbonne
3 PSE - Paris School of Economics

To understand how decisions to invest in stocks are taken, economists need to elicit expectations relative to expected risk-return trade-off. One of the few surveys which have included such questions is the Survey of Economic Expectations in 1999-2001. Using this survey, Dominitz and Manski find an important heterogeneity across respondents that can hardly be accounted for by simple models of expectations formation. This paper claims that much of the heterogeneity derives from pathologies affecting respondents. Adapting a principle of dual-reasoning borrowed from Kahneman, we classify respondents according to their sensitivity to these pathologies, and find a strong homogeneity across the less sensitive respondents. We then sketch a model of expectation formation.

Mots clés: investment funds; Subjective probability distribution; dual system of reasoning; investment funds.

Domaines: Economies et finances

Fabian Gouret, Guillaume Hollard. When Kahneman meets Manski: Using dual systems of reasoning to interpret subjective expectations of equity returns. Journal of Applied Econometrics, 2011, 26 (3), pp.371-392. ⟨halshs-00867700⟩