Inconsistency Pays?: Time-inconsistent subjects and EU violators earn more

Berg, Nathan and Eckel, Catherine and Johnson, Cathleen (2010): Inconsistency Pays?: Time-inconsistent subjects and EU violators earn more.

Abstract

Experimental choice data from 881 subjects based on 40 time-tradeoff items and 32 risky choice items reveal that most subjects are time-inconsistent and most violate the axioms of expected utility theory. These inconsistencies cannot be explained by well-known theories of behavioral inconsistency, such as hyperbolic discounting and cumulative prospect theory. Aggregating expected payoffs and the risk associated with each subjects’ 72 choice items, the statistical links between inconsistency and total payoffs are reported. Time-inconsistent subjects and those who violate expected utility theory both earn substantially higher expected payoffs, and these positive associations survive largely undiminished when included together in total payoff regressions. Consistent subjects earn lower than average payoffs because most of them are consistently impatient or consistently risk averse. Positive payoffs from inconsistency cannot, however, be fully explained by greater risk taking. Controlling for the total risk of each subject’s risk choices as well as for socio-economic differences among subjects, time inconsistent subjects earn significantly more money, in statistical and economic terms. So do expected utility violators. Positive returns to inconsistency extend outside the domain in which inconsistencies occurs, with time-inconsistent subjects earning more on risky choice items, and expected utility violators earning more on time-tradeoff items. The results seem to call into question whether axioms of internal consistency—and violations of these axioms that behavioral economists frequently focus on—are economically relevant criteria for evaluating the quality of decision making in human populations.

• Item Type: MPRA Paper
• Language: English
• Keywords: behavioral economics, hyperbolic discounting, hypobolic, normative, coherence, correspondence, consistency, irrationality, rationality
• Subjects: D - Microeconomics > D0 - General > D03 - Behavioral Microeconomics: Underlying Principles

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