Identification of Interaction Effects in Survey Expectations: A Cautionary Note

Abstract

A growing body of literature reports evidence of social interaction effects in survey expectations. In this note, we argue that evidence in favor of social interaction effects should be treated with caution, or could even be spurious. Utilizing a parsimonious stochastic model of expectation formation and dynamics, we show that the existing sample sizes of survey expectations are about two orders of magnitude too small to reasonably distinguish between noise and interaction effects. Moreover, we argue that the problem is compounded by the fact that highly correlated responses among agents might not be caused by interaction effects at all, but instead by model-consistent beliefs. Ultimately, these results suggest that existing survey data cannot facilitate our understanding of the process of expectations formation.

A Network-Based Explanation of Inequality Perceptions

“…For the first time, we are able to infer the composition of these reference groups from readily available observational data on perceived inequality to inform both empirical investigations as well as more comprehensive model-building in other regards. Directly investigating perception networks might provide a possible remedy for the problem that identification of interaction effects within survey data in the form of time series is hindered by sample sizes that are typically one or two orders of magnitude too low to distinguish noise from true interaction (Alfarano & Milaković 2012). Our main empirical prediction is that the homogeneity of social groups, the fraction of links to agents within the own income decile, roughly follows a U-shaped pattern with a massive decrease in diversity for the richest and (a quantitatively much more modest one) for the poorest agents.…”

Taxonomía y dinámica de las expectativas económicas de los empresarios industriales en Uruguay. Un análisis de conglomerados

“…Numerosos estudios emplean expectativas cuantitativas con fines de pronóstico y detección de cambios en las fluctuaciones cíclicas (Batchelor, 1982;Berk, 1999;Hanssens & Vanden, 1987;Kangasniemi Kangassalo & Takala, 2010;Kangasniemi & Takala, 2012;Kauppi, Lassila & Teräsvirta, 1996;Öller, 1990;Rahiala & Teräsvirta, 1993;Smith & McAleer, 1995;Svensson, 1997). Entre los que exploran los datos de las encuestas de opinión como indicadores del comportamiento empresarial, para testear diferentes esquemas de formación de expectativas o interacciones entre agentes, pueden citarse a Batchelor (1982), Smith & McAleer (1995) y Alfarano & Milakovic (2010), entre otros.…”

Expectations and industrial output in Uruguay: Sectoral inter dependence and common trends

“…Svensson (1997) and Berk (1999) examined the measurement of expected inflation, while Pesaran, Pierse and Lee (1993), Rahiala and Teräsvirta (1993), Smith and McAleer (1995), Kauppi, Lassila and Teräsvirta (1996), Öller (1990) and Hanssens and Vanden Abeele (1987) focused on production growth, and Batchelor (1982) considered employment. Authors such as Batchelor (1982), Smith and McAleer (1995) and Alfarano and Milakovic (2010) have explored the use of data from opinion polls as indicators of business behaviour to test different models for the formation of expectations or interactions among agents. These studies have served to identify a set of problems with the processing and interpretation of data from opinion polls which cast doubt on whether these data are a suitable proxy for agents' actual expectations.…”

“…Those who have engaged with the subject, chiefly for the purpose of identifying and predicting changes in cyclical fluctuations, include Svensson (1997), Berk (1999), Pesaran, Pierse and Lee (1993), Rahiala and Teräsvirta (1993), Smith and McAleer (1995), Kauppi, Lassila and Teräsvirta (1996), Öller (1990), Hanssens and Vanden Abeele (1987) and Alfarano and Milakovic (2010).…”