American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Who Is (More) Rational?
American Economic Review
vol. 104,
no. 6, June 2014
(pp. 1518–50)
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.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.104.6.1518Additional Materials
JEL Classification
- 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
- D15 Intertemporal Household Choice; Life Cycle Models and Saving
- G11 Portfolio Choice; Investment Decisions