Measuring subjective expectations in developing countries: a critical review and new evidence

Summary

The majority of economic decisions are forward-looking and thus involve
expectations of future outcomes. Understanding the expectations that
individuals have is thus of crucial importance to designing and
evaluating policies in health, education, finance, migration, social
protection, and many other areas. However, the majority of developing
country surveys are static in nature and many do not elicit subjective
expectations of individuals. Possible reasons given for not collecting
this information include fears that poor, illiterate individuals do not
understand probability concepts, that it takes far too much time to ask
such questions, or that the answers add little value. This paper
provides a critical review and new analysis of subjective expectations
data from developing countries and refutes each of these concerns. We
find that people in developing countries can generally understand and
answer probabilistic questions, such questions are not prohibitive in
time to ask, and the expectations are useful predictors of future
behavior and economic decisions. The paper discusses the different
methods used for eliciting such information, the key methodological
issues involved, and the open research questions. The available evidence
suggests that collecting expectations data is both feasible and
valuable, suggesting that it should be incorporated into more developing
country surveys.