SSE/EFI Working Paper Series in Economics and Finance
Is there Evidence of Pessimism and Doubt in Subjective Distributions? A Comment on Abel
() and Paul Söderlind
Abstract: Abel (2002) shows that pessimism and doubt in the
subjective distribution of the growth rate of consumption reduce the
riskfree rate puzzle and the equity premium puzzle. We quantify the amount
of pessimism and doubt in survey data on US consumption and income.
Individual forecasters are in fact pessimistic, but show marked
overconfidence rather than doubt. Whether this implies that overconfidence
should be built into Abel's model depends on how the empirically
heterogeneous subjective distributions are mapped into the distribution of
a fictitious representative agent. We work out the form of this mapping in
an Arrow-Debreu economy and show that the equity premium increases with the
dispersion of beliefs. We then estimate this aggregate distribution and
find little evidence of either overconfidence or doubt.
Keywords: equity premium; riskfree rate; aggregation of beliefs; Survey of Professional Forecasters; Livingston Survey; (follow links to similar papers)
JEL-Codes: C42; E44; G12; (follow links to similar papers)
14 pages, December 14, 2002, Revised October 1, 2003
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