PROBABILISTIC THINKING AND ECONOMIC BEHAVIOR

University Of Michigan At Ann Arbor, Ann Arbor MI

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Abstract

Probability beliefs play a central role in forward-looking models of decision-making. Examples of probability beliefs that may affect individual decisions related to aging include beliefs about the mortality risks that a person faces and beliefs about the future value of retirement portfolios of stocks, bonds, and social security benefits. Economists have often assumed that researchers and persons alike make accurate probabilistic predictions of future events. However, there is much reason to be skeptical of this rational expectations assumption and, consequently, good reason to measure beliefs directly. The Health and Retirement Study (HRS) has pioneered asking questions about subjective probability beliefs on a wide variety of topics, including general events (e.g., economic depression, stock market prices, weather); events with personal information (e.g., survival to a given age, entry into a nursing home), events with personal control (e.g., retirement, bequests). This project will utilize these data in conjunction with models of survey response and behavior under uncertainty to address four related questions: 1. How are responses to probability questions on surveys related to the probability beliefs of respondents? 2. What is the correspondence between the probability beliefs of respondents and the objective risks they face? 3. How do people form their subjective probability beliefs and how are these beliefs affected by experience? 4. How do probability beliefs affect decisions?