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Comparing Predictions and Outcomes: Theory and Application to Income Changes

Das, Marcel and Dominitz, Jeff and van Soest, Arthur (1999) Comparing Predictions and Outcomes: Theory and Application to Income Changes. Journal of the American Statistical Association, 94 (445). pp. 75-85. ISSN 0162-1459. doi:10.1080/01621459.1999.10473820.

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Household surveys often elicit respondents' intentions or predictions of future outcomes. The survey questions may ask respondents to choose among a selection of (ordered) response categories. If panel data or repeated cross-sections are available, then predictions may be compared with realized outcomes. The categorical nature of the predictions data complicates this comparison, however. Generalizing previous findings on binary intentions data, we derive bounds on features of the empirical distribution of realized outcomes under the “best-case” hypothesis that respondents form rational expectations and that reported expectations are best predictions of future outcomes. These bounds are shown to depend on the assumed model of how respondents form their “best prediction” when forced to choose among (ordered) categories. An application to data on income change expectations and realizations illustrates how alternative response models may be used to test the best-case hypothesis.

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Additional Information:© 1998 American Statistical Association. Received May 1997. Revised September 1998 The authors are grateful to an associate editor, two referees, and Ben van der Genugten for valuable comments. Much of this work was completed while the second author was a member of the Social Science Faculty at the California Institute of Technology. Financial support by the Royal Netherlands Academy of Arts and Sciences (KNAW) is gratefully acknowledged by the third author.
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Royal Netherlands Academy of Arts and SciencesUNSPECIFIED
Subject Keywords:predictions, ordered-category data, income expectations
Issue or Number:445
Classification Code:JEL-classification: C52, C53, D12
Record Number:CaltechAUTHORS:20170408-151151727
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:76039
Deposited By: 1Science Import
Deposited On:16 May 2017 23:03
Last Modified:15 Nov 2021 16:57

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