Belief identification by proxy

TL;DR

This paper introduces a novel method for identifying individual beliefs by extending the state space with a proxy variable, enabling belief identification without assuming state-independent utilities.

Contribution

The paper proposes a new methodology that uses proxies to identify beliefs, overcoming a long-standing challenge in belief measurement without restrictive utility assumptions.

Findings

The method successfully identifies beliefs using proxy variables.

It extends the state space to facilitate belief inference.

The approach is analogous to instrumental variables in econometrics.

Abstract

It is well known that individual beliefs cannot be identified using traditional choice data, unless we exogenously assume state-independent utilities. In this paper, I propose a novel methodology that solves this long-standing identification problem in a simple way. This method relies on the extending the state space by introducing a proxy, for which the agent has no stakes conditional on the original state space. The latter allows us to identify the agent's conditional beliefs about the proxy given each state realization, which in turn suffices for indirectly identifying her beliefs about the original state space. This approach is analogous to the one of instrumental variables in econometrics. Similarly to instrumental variables, the appeal of this method comes from the flexibility in selecting a proxy.