Working Paper: NBER ID: w16791
Authors: Syngjoo Choi; Shachar Kariv; Wieland Müller; Dan Silverman
Abstract: 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.
Keywords: decision-making quality; rationality; revealed preference; risk; wealth differentials; Netherlands; experiment
JEL Codes: C93; D01; D03; D12; D81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Socioeconomic variables (P36) | Decision-making quality (CCEI) (L15) |
| Socioeconomic variables (P36) | Household wealth (G59) |
| Past income (E25) | Decision-making quality (CCEI) (L15) |
| Risk tolerance (G11) | Decision-making quality (CCEI) (L15) |
| Decision-making quality (CCEI) (L15) | Household wealth (G59) |
| Higher CCEI (D29) | More likely to own homes (R21) |
| Higher CCEI (D29) | Allocate larger fraction of wealth into housing (R21) |
| High-income and high-education (I24) | Greater decision-making consistency (D70) |
| Men (C92) | More consistent than women (J16) |
| Younger subjects (J14) | More consistent than older subjects (J14) |