Tuesday 22 February 2011

Who Is (More) Rational?

That is the title of a new NBER Working Paper by Syngjoo Choi, Shachar Kariv, Wieland Mueller and Dan Silverman. They use revealed preference theory as a criterion for decision-making quality: if decisions are high quality then there exists a utility function that the choices maximise.

Using data from a field experiment they find that there is considerable heterogeneity in subjects' consistency with utility maximisation. In particular high-income and high-education subjects display greater levels of consistency than low-income and low-education subjects, men are more consistent than women, and young subjects are more consistent than older subjects. They also note that consistency with utility maximisation is strongly related to wealth.

The abstract for the paper reads:
Revealed preference theory offers a criterion for decision-making quality: if decisions are high quality then there exists a utility function that the choices maximize. We conduct a large-scale field experiment that enables us to test subjects' choices for consistency with utility maximization and to combine the experimental data with a wide range of individual socioeconomic information for the subjects. There is considerable heterogeneity in subjects' consistency scores: high-income and high-education subjects display greater levels of consistency than low-income and low-education subjects, men are more consistent than women, and young subjects are more consistent than older subjects. We also find that consistency with utility maximization is strongly related to wealth: a standard deviation increase in the consistency score is associated with 15-19 percent more wealth. This result conditions on socioeconomic variables including current income, education, and family structure, and is little changed when we add controls for past income, risk tolerance and the results of a standard personality test used by psychologists.

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