Do Teenagers Exhibit Rational Expectations About Mortality, Fertility and Education Outcomes? Nikolay Braykov Duke University

1
Do Teenagers Exhibit Rational Expectations About
Mortality, Fertility and Education
Outcomes?Nikolay BraykovDuke University
Introduction
Methodology
Results
Research Questions and Methods
Forecast Errors interpretation of OLS results
and density plots Mortality overestimate e
30x OP elimination of 0.5 (restricted sample)
decreases error by half bias largely driven by
focal responses, due to inability to express
probabilities (explained by lower ability). At
least some of the bias is due to
pessimism/tendency to overpredict small
probabilities. Relation of 50/50 responses to
smoking suggests public information heightens
uncertainty about death. Pregnancy
underestimate, e 40 of OP less consistent for
direction 0-responses (restricted sample) face
high OPs Support hypotheses that 1) error is
largely due to focal responses and 2) teens
underestimate their conception risk because of
misinformation about birth control, rather than
underestimate the costs associated with an
unexpected pregnancy because of short foresight.
Education HS juniors (restricted sample) are
almost accurate, e 20 of OP bias due to
general uncertainty about ability rather than
limitations in answering question (the effect of
ability is the largest of all domains) The error
is also more pronounced for demographics that
have a less certain college future) low income,
low-ability, non-white Bayesian updating
Convergence parameters have the expected signs
probabilities are revised downwards for mortality
and education and upward for fertility The risk
equivalent for fertility is largest, even though
the bias is not. The revision for mortality is
surprisingly small, considering the large bias
and longer updating period
Forecast error Kernel densities Full Sample
Restricted
My paper examines the accuracy, updating and
information content of individual self-reported
expectations (referred to as subjective
probabilities). I focus on young people between
the ages of 15 and 17. I use expectation
questions about mortality, fertility and
education outcomes from the 1997 National
Longitudinal Survey of Youth (NLSY
97). Motivation Microeconomic models commonly
use the Rational Expectations Hypothesis (REH)
1) when forecasting future outcomes, agents
incorporate all available information in the same
manner 2) agents understand the stochastic
processes that determine outcomes Hence, on
average, subjective beliefs should coincide with
realizations (Schwandt 2009). Studies using the
REH usually lack evidence that their assumption
is correct. Models of behavior under uncertainty
would be substantially improved if they included
self-reported probabilities from survey data
(Manski 2004). Economics has made limited use of
survey data, because methods used to elicit
expectations are looked upon with skepticism
(Fischhoff et al 2009). Question A growing
number of studies confirm survey responses from
recent large panels can proxy reasonably well for
actual expectations. It remains a question,
however, whether and why agents are
systematically biased and whether subjective
probabilities contain information that cannot be
inferred from more traditional sources.

• Do Subjective Probabilities exhibit a
• systematic divergence from Objective
  Probabilities?
• ___________________________
• Objective probabilities (OP) researchers best
• a-posteriori estimate of the actual risk the
• individual is facing at baseline
• PREDICT INDIVIDUAL LEVEL OPs AS LOGIT
• OF OUTCOME ON DETERMINANTS
• Logit (DIE) a ß1 DEM ß2HEALTH ß3SUBST
  ß4CRIME e
• Logit (PREGN ) a ß1 DEM ß2SEX ß3FAMILY
  ß4EDUC e
• Logit (ENROLL) a ß1 DEM ß2EDUC ß3FAMILY
  ß4HLTH e
• MEASURE DIRECTION AND MAGNITUDE OF
• BIAS AS FORECAST ERROR e
• e SP OP
• PLOT ERROR DISTRIUTION

• 2. Is the group-level variation in the accuracy
  of
• beliefs related to certain characteristics/behavio
  rs,
• or measurement issues?
• ___________________________
• OLS OF ERROR ON BEHAVIORS AND
• DEMOGRAPHIC CHARACTERISTICS
• e a ß1 DEM ß2 ABIL ß3 SMOKER ß4
  MENTAL_HLTH
• REH error should be independent of individual
• characteristics (expectations are homogenously
• formed)

Private information Significant for pregnancy
and education Such information could be the
intention to have a child because one expects to
marry in the next five years I ran regressions
for fertility on restricted sample of people who
were single in 2000 but got married in the next 5
years. The parameter for SP increased in value
and remained significant.
Conclusions

• 3 . Does the updating of subjective probabilities
  
• between waves suggest rational learning?
• ___________________________
• BAYESIAN UPDATING MODEL
• Posterior risk Pt1 is a function of prior
  probability
• Pt and weighted risk equivalent of new info, Rt
• - Rt is a function of fixed demographic
  characteristics
• and change variables that reflect information
  acquired
• between period t and t1
• Hypothesis if there is learning, expect positive
  
• estimates for weight of risk equivalent) for
• underestimated beliefs (fertility), and vice
  versa for
• overestimated SPs (mortality and education)

Data
Literature Manski, Charles F. "Measuring
Expectations." Econometrica, 72, no. 5
(2004). Fischhoff, Baruch, Aandrew M. Parker,
Wandi Bruine de Bruin, Julie Downs, Claire
Palmgren, and Robyn Dawe. "Teen Expectations for
Significant Life Events." The Public Opinion
Quarterly 64, no. 2 (2000). Schwandt, Hannes.
"Testing the Rational Expectations Hypothesis
over Stages and States of Life Micro Evidence
from the German Socio-Economic Panel." In
Universitat Pompeu Fabra Working Papers, 2009.
I find substantial individual-level biases in the
data teenagers expectations are not fully
accurate and homogenous as suggested by the REH.
This implies models of behavior under uncertainty
should relax their expectation assumptions and
combine subjective probability data with observed
choices to accommodate these forecast biases.
The magnitude of the bias and amount of focal
responses was very large for mortality and
surprisingly small for education. This suggests
the REH is more applicable in situation where the
mechanism behind the outcome is clear. There is
evidence of convergence for all three domains,
suggesting there is a rational learning process.
However, I could not establish many of the
specific events that constitute the learning
process. Finally, subjective probabilities
possess predictive power, and certain anticipated
events are included in this private information.

• The NLSY97 Tracks transition to adulthood of
• gt 8,000 teenagers born between 1980-84
• Advantages
• Expectation elicited as integer b/n 0-100, making
  
• a quantitative analysis possible
• Panel format allows to observe outcomes and
• Expectations at an individual level
• Limitations
• -Understanding of the question, especially
  mortality
• -Focal responses
• Subjective Probabilities (SP)
• I analyze the responses to the following SP
  questions
• asked to participants between ages of 15 and 20
• What is the percent chance that you will die
  (from
• any cause ) between now and when you turn 20?
• 2. What is the percent chance you will become

Acknowledgements I would like to thank my
advisor Dr. Frank Sloan, J. Alexander McMahon
Professor of Health Policy and Management and
Professor of Economics for his guidance and
constructive criticism. I also extend my deepest
gratitude to Dr. Kent Kimbrough, Professor of
Economics and Instructor of the year-long
Economics Honors Thesis Seminar, as well as my
peers from said thesis seminar.

• 4. Is there private information in SPs?
• ___________________________
• OLS OF OUTCOME ON SP AND OP
• Ri a ßSi ?Oi e
• If objective subjective probabilities have no
  predictory
• power, expect estimate of ß 0