The Ex Post Accuracy of Subjective Beliefs : A New Measure and Decomposition

The choices, and hence outcomes, of students, consumers, or investors depend on their beliefs. Inaccurate beliefs lead to poor choices and undesirable outcomes. Recent attempts to elicit probabilistic expectations that capture the full distribution describing agents’ beliefs provide an opportunity to study those beliefs. We propose a novel but intuitive measure of the average ex post accuracy of a group of economic agents’ beliefs, and show how a decomposition of that measure captures different sources of inaccuracy: failure of rational expectations, subjective uncertainty, and aggregate shocks. We illustrate with application to the income expectations of college students and recent graduate in the BEREA panel survey