Preferences, Ability, and Personality: Explaining Heterogeneity in Decisions Under Risk and Delay

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 07.03.2019, 12:15 - 13:30

   

Presentation by 

Tomás Jagelka (Ecole Polytechnique, Paris)
   

Abstract:

This paper establishes an empirical mapping between economic preferences and psychological personality traits. I use the Random Preference Model to estimate distributions of risk and time preferences complete with their individual-level stability and people’s propensity to make mistakes from unique experimental data with information on over 100 incentivized choice tasks for each of more than 1,200 individuals. I am thus able to separate true (or average) preferences from stochastic components affecting choices. Using factor analysis to extract information on individuals’ ability and personality, I show that their link with preferences is much stronger than previously documented. I explain up to 50% of the variation in both average preferences and in individuals’ capacity to make consistent rational choices using four factors related to cognitive ability and three of the Big Five personality traits. The five structural parameters of my model largely dominate a wide range of demographic and socio-economic variables when it comes to explaining observed individual choices between risky lotteries and time-separated payments. These findings have ramifications for understanding the mechanism through which ability and personality impact economic decisions. They suggest that the latter should be included as controls in empirical work when direct preference estimates are unavailable. As I find that stochastic elements play an important role in decision making, I recommend that they be taken into account in welfare analysis. My approach includes a robust treatment of random errors and is generalizable to diverse settings in which one wishes to explain observed heterogeneity in risky or intertemporal choices through latent factors measured by multiple noisy indicators.

   
   
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