Who is more rational?

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Revealed preference theory o§ers a criterion for decision-making quality: if decisions are high quality then there exists a utility function that the choices maximize. We conduct a large-scale OÌeld experiment that enables us to test subjectsiÌchoices for consistency with utility maximization and to combine the experimental data with a wide range of individual socioeco- nomic information for the subjects. There is considerable heterogeneity in subjectsiÌconsistency scores: high-income and high-education subjects display greater levels of consistency than low- income and low-education subjects, men are more consistent than women, and young subjects are more consistent than older subjects. We also find that consistency with utility maximization is strongly related to wealth: a standard deviation increase in the consistency score is associated with 15-19 percent more wealth. This result conditions on socioeconomic variables including current income, education, and family structure, and is little changed when we add controls for past income, risk tolerance and the results of a standard personality test used by psychologists.

Source: “Who Is (More) Rational?” from Jan 2011 Working Paper No: 1105, DEPARTMENT OF ECONOMICS, UNIVERSITY OF VIENNA

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