American Economic Review: Vol. 104 No. 6 (June 2014)

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Who Is (More) Rational?

Article Citation

Choi, Syngjoo, Shachar Kariv, Wieland Müller, and Dan Silverman. 2014. "Who Is (More) Rational?" American Economic Review, 104(6): 1518-50.

DOI: 10.1257/aer.104.6.1518

Abstract

Revealed preference theory offers a criterion for decision-making quality: if decisions are high quality then there exists a utility function the choices maximize. We conduct a large-scale experiment to test for consistency with utility maximization. Consistency scores vary markedly within and across socioeconomic groups. In particular, consistency is strongly related to wealth: a standard deviation increase in consistency is associated with 15-19 percent more household wealth. This association is quantitatively robust to conditioning on correlates of unobserved constraints, preferences, and beliefs. Consistency with utility maximization under laboratory conditions thus captures decision-making ability that applies across domains and influences important real-world outcomes.

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Authors

Choi, Syngjoo (U College London)
Kariv, Shachar (U CA, Berkeley)
Müller, Wieland (U Vienna and Tilburg U)
Silverman, Dan (AZ State U)

JEL Classifications

D12: Consumer Economics: Empirical Analysis
D14: Household Saving; Personal Finance
D81: Criteria for Decision-Making under Risk and Uncertainty
D83: Search; Learning; Information and Knowledge; Communication; Belief
D91: Intertemporal Household Choice; Life Cycle Models and Saving
G11: Portfolio Choice; Investment Decisions


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