Abstract
Abstract We use a survey experiment to generate direct evidence on how people acquire and process information. Participants can buy different information signals that could help them forecast future national home prices. We elicit their valuations and exogenously vary the cost of information. 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 provide a model with costly acquisition and processing of information, which can match most of our empirical results.
Highlights
Consumer expectations play a central role in modern macroeconomics and finance
We find that respondents that are more confident in their existing knowledge of the housing market, as indicated by low uncertainty in their prior forecast or them indicating that they have previously looked up house-price information, have a significantly higher willingness to pay (WTP) for the information
Using an innovative experimental setup measuring agents’ choice, valuation and use of information, this paper attempts to understand the role of information frictions in explaining the heterogeneity in consumers’ expectations
Summary
Consumer expectations play a central role in modern macroeconomics and finance. As a result, a growing literature studies survey data on expectations. The heterogeneity in expectations emerges at three different stages of belief formation: information selection, information acquisition, and information processing. We find that sophisticated respondents, as measured by their education or numeracy, are substantially more likely to choose the expert forecast than less sophisticated respondents This finding suggests that at least part of the variation is due to heterogeneity in cognitive abilities that are helpful in identifying informative signals.[2]. Experimental findings that at first seem puzzling: respondents with lower prior uncertainty have a higher willingness to pay for information, spend more time processing the information, and revise their beliefs more. We show that an individual’s prior uncertainty is correlated with behavior at each stage of the expectation formation process We interpret this as evidence of a selection effect: some individuals care more about having accurate beliefs on house prices.
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