Berg, Nathan and Eckel, Catherine and Johnson, Cathleen (2010): Inconsistency Pays?: Time-inconsistent subjects and EU violators earn more.
Download (313kB) | Preview
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|
|Original Title:||Inconsistency Pays?: Time-inconsistent subjects and EU violators earn more|
|Keywords:||behavioral economics, hyperbolic discounting, hypobolic, normative, coherence, correspondence, consistency, irrationality, rationality|
|Subjects:||D - Microeconomics > D0 - General > D03 - Behavioral Microeconomics: Underlying Principles|
|Depositing User:||Nathan Berg|
|Date Deposited:||10. Nov 2010 14:30|
|Last Modified:||16. Feb 2013 01:58|
Ariely, D. (2008) Predictably Irrational, New York: HarperCollins.
Ashraf, Nava, Dean Karlan, and Wesley Yin. (2006). “Tying Odysseus to the Mast: Evidence from a Commitment Savings Product in the Philippines,” Quarterly Journal of Economics, 121(2), 673-697.
Benjamin, Daniel, Sebastian A. Brown, Jesse M. Shapiro. (2006). “Who is ‘Behavioral’? Cognitive Ability and Anomalous Preferences,” Working Paper, University of Chicago.
Berg, N. (2003) Normative behavioral economics, Journal of Socio-Economics 32, 411-427.
Bernheim, B.D. and Rangel, A. (forthcoming), Behavioral Public Economics: Welfare and Policy Analysis with Fallible Decision-Makers, in Peter Diamond and Hannu Vartianen (eds.), Institutions and Behavioral Economics.
Bookstaber, R. and Langsam, J., 1985, On the optimality of coarse behavior rules, Journal of Theoretical Biology 116, 161-193.
Camerer, C., Issacharoff, S., Loewenstein, G., O’Donoghue and Rabin, M. (2003) Regulation for conservatives: Behavioral economics and the case for asymmetric paternalism, University of Pennsylvania Law Review 151, 1211-1254.
Caplan, B. (2001) Rational ignorance versus rational irrationality, Kyklos 54(1): 3-26.
Castillo, Marco, Paul Ferraro, Jeffrey Jordan, and Ragan Petrie. (2008). "The Today and Tomorrow of Kids," Working Paper, Georgia Tech.
Coller, Maribeth, Harrison, Glenn W., and Rutström, Elisabet E. (2005), "Does Everyone Have Quasi-Hyperbolic Preferences?" Working Paper, University of Central Florida.
Dohmen, Thomas, Armin Falk, David Huffman, and Uwe Sunde. (2007). “Are Risk Aversion and Impatience Related to Cognitive Ability?” IZA Discussion Paper No. 2735.
Gigerenzer, G., Todd, P.M., ABC Research Group, (1999), Simple Heuristics that Make Us Smart. New York: Oxford University Press.
Holt, Charles A. (1986). “Preference Reversals and the Independence Axiom,” American Economic Review, 76, 508-15.
Hubal, R., Staszewski, J. and Marrin, S. (2007) Overcoming Decision Making Bias: Training Implications for Intelligence and Leadership, The Interservice/Industry Training, Simulation & Education Conference (I/ITSEC)Volume: 2007 (Conference Theme: Maintaining the Edge...Transforming the Force. )
Jacobson, S and Petrie, R. (forthcoming), Inconsistent Choices in Lottery Experiments: Evidence from Rwanda. Journal of Risk and Uncertainty.
Jolls, Christine and Cass R. Sunstein. 2006. Debiasing Through Law, Journal of Legal Studies, 35:199-241.
Laibson, David. "Golden Eggs and Hyperbolic Discounting." Quarterly Journal of Economics, 1997, 112(2), pp. 443–477.
Loewenstein G, Brennan T, Volpp KG. 2007. Asymmetric paternalism to improve health behaviors. Journal of the American Medical Association. Nov 28;298(20):2415-7.
Meier, Stephan and Charles Sprenger. (2007). “Impatience and Credit Behavior: Evidence from a Field Experiment,” Federal Reserve Bank of Boston Working Paper Series, No. 07-3.
O'Donoghue, Ted and Rabin, Matthew. "Doing It Now or Later." American Economic Review, 1999, 89(1), pp. 103–124.
O’Donoghue, T. and Rabin, M. (2003) Studying optimal paternalism, illustrated by a model of sin taxes, American Economic Review 93(2), 186-191.
O'Donoghue, Ted, and Matthew Rabin. 2003. A note on optimal paternalism and health capital subsidies. Economics Letters. Volume 101, Issue 3, December 2008, Pages 241-242.
National Institute of Health (2008) http://www.nichd.nih.gov/publications/pubs/vasectomy_safety.cfm#xdisad Retrieved December 9, 2008.
Rabin, Matthew. 2000. Risk Aversion and Expected-Utility Theory: A Calibration Theorem. Econometrica. 68(5): 1281–292.
Schmidtz, D. (1995). Rational Choice and Moral Agency. Princeton: Princeton University Press.
Smith, Vernon L. 2003. Constructivist and Ecological Rationality in Economics. American Economic Review 93(3): 465-508.
Thaler, Richard H., and Shlomo Behartzi. Save More Tomorrow™: Using Behavioral Economics to Increase Employee Saving. Journal of Political Economy, 2004, vol. 112, 164-187.
Thaler, R.H. and Sunstein, C.R. (2008) Nudge: Improving Decisions About Health, Wealth, and Happiness, New Haven, CT: Yale University Press.