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Unformatted text preview: The Board of Regents of the University of Wisconsin System Probability Limits: Are Subjective Assessments Adequately Accurate? Author(s): William F. Bassett and Robin L. Lumsdaine Source: The Journal of Human Resources, Vol. 36, No. 2 (Spring, 2001), pp. 327-363 Published by: University of Wisconsin Press Stable URL: http://www.jstor.org/stable/3069662 . Accessed: 07/09/2011 23:09 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact firstname.lastname@example.org. University of Wisconsin Press and The Board of Regents of the University of Wisconsin System are collaborating with JSTOR to digitize, preserve and extend access to The Journal of Human Resources. http://www.jstor.org Probability Limits Are Subjective Assessments Adequately Accurate? William F. Bassett Robin L. Lumsdaine ABSTRACT The Health and Retirement Study asks respondents their subjective proba- bilities about 12 future events. An individual's responses contain a com- mon component that is unrelated to the true probability of the event in question. Use of the entire set of an individual's responses to control for this unobserved individual heterogeneity can improve the information con- tent in responses regarding intergenerational transfer and labor force par- ticipation plans. Although there is little overall gain from renormaliza- tion, in samples where the respondent may not fully have understood the question adjusting the responses for heterogeneity leads to an improved ability to predict outcomes in later waves. I. Introduction Despite a large literature on "intentions" data, which dates back to the mid-1950s, how individuals form expectations, and how these expectations are used in decision making, is still not well understood. The early economic studies of intentions centered primarily on their usefulness in predicting the purchase of con- William Bassett is an economist at the Board of Governors of the Federal Reserve System. Robin Lums- daine is a professor of economics at Brown University and is also a Research Associate, National Bu- reau of Economic Research. The authors have benefitted from discussions with Andrew Foster, Michael Hurd, Chuck Manski, Ignacio Palacios-Huerta, and Mark Pitt. They also thank Barbel Knauper and an anonymous referee for helpful comments. Financial support from the National Institute on Aging through grant number R03-AG14173 is gratefully acknowledged. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors of the Federal Reserve System. As part of the agreement or the Board of Governors of the Federal Reserve System....
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