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 decision-making quality 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 affects 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 Preferences (GARP), despite having a sample size large enough to detect even small differences between treatments with 80% power. We also report no effect on first-order stochastic dominance and risk preferences. Our finding suggests that researchers need not worry about economic rationality breaking down when subjects are placed under temporary working memory load.

• 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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