Thursday, March 31, 2011

Who is rational?

Much of the experimental economics literature is about finding situations where some of the fundamental axioms of rational utility theory are violated. And you are always going to find someone who does not act rationally. But this literature often understates how often people are actually rational and how this translates into better outcomes.

Syngjoo Choi, Shachar Kariv, Wieland Müller and Dan Silverman study the characteristics of rational people. Specifically, they conducted a field experiment on 1182 households in the Netherlands to find whether they behaved consistently with revealed preference theory. They then combine these results with a large array of socio-demographic and economic characteristics. They find that the more rational people are, the higher income and education they have. Nobody will be surprised to learn that men are more consistent, but I am shocked to see that young people are more rational. Why would life experience make you deviate from rationality? Finally, the impact of rationality on outcomes is substantial: a one standard deviation increase in consistency is associated with a 15-19% increase in wealth.


conchis said...

Nobody will be surprised to learn that men are more consistent

I am surprised. What's the supposed explanation for this?

Anonymous said...

I do not understand women either, they must not be rational.