American Economic Review2014-07-04 5:42 PM

Who Is (More) Rational?

Abstract

Revealed preference theory offers a criterion for decision-making quality: if decisions are high quality then there exists a utility function the choices maximize. We conduct a large-scale experiment to test for consistency with utility maximization. Consistency scores vary markedly within and across socioeconomic groups. In particular, consistency is strongly related to wealth: A standard deviation increase in consistency is associated with 15–19 percent more household wealth. This association is quantitatively robust to conditioning on correlates of unobserved constraints, preferences, and beliefs. Consistency with utility maximization under laboratory conditions thus captures decision-making ability that applies across domains and influences important real-world outcomes.

 

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http://dx.doi.org/10.1257/aer.104.6.1518 

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American Economic Review

The American Economic Review is a general-interest economics journal. Established in 1911, the AER is among the nation's oldest and most respected scholarly journals in the economics profession.

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