Economic rationality under cognitive load

Drichoutis, Andreas C. and Nayga, Rodolfo (2017): Economic rationality under cognitive load.

Abstract

Economic analysis assumes that consumer behavior can be rationalized by a utility function. Previous research has shown that some consistency of choices with economic rationality can be captured by permanent cognitive ability but has not examined how a temporary load in subjects' working memory can affect economic rationality. In a controlled laboratory experiment, we exogenously vary cognitive load by asking subjects to memorize a number while they undertake an induced budget allocation task (Choi et al. 2007a,b). Using a number of manipulation checks, we verify that cognitive load has adverse effects on subjects' performance in reasoning tasks. However, we find no effect in any of the goodness-of-fit measures that measure consistency of subjects' choices with the Generalized Axiom of Revealed Preference (GARP), despite having a sample size large enough to detect even small differences between treatments with 80% power. We also find no effect on first-order stochastic dominance and risk preferences. Our finding suggests that economic rationality can be attained even when subjects are placed under temporary working memory load and despite the fact that the load has adverse effects in reasoning tasks.

• Item Type: MPRA Paper
• Language: English
• Keywords: Cognitive load, rationality, revealed preferences, working memory, response times, laboratory experiment, risk
• Subjects: C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior; D - Microeconomics > D0 - General > D03 - Behavioral Microeconomics: Underlying Principles; D - Microeconomics > D1 - Household Behavior and Family Economics > D11 - Consumer Economics: Theory; D - Microeconomics > D1 - Household Behavior and Family Economics > D12 - Consumer Economics: Empirical Analysis; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions

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