Abstract: Neuroticism is responsible for the decline of happiness with high income and its increase for lower incomes in both SOEP and BHPS datasets. We suggest that the effect is due to the psychological cost of the gap between aspiration and realized income. High income individuals fail to meet expectation, this explains lower increase or decrease of life satisfaction for highly neurotic individuals for higher income levels. Data show a hump-shaped relation between income and life satisfaction, with a bliss point between 250-300K 2005 USD. For highly neurotic this peak occurs at lower income, and disappears for non neurotic individual
Abstract: Standard economic models with complete information predict a positive, monotonic relationship between pay and performance. This prediction does not always hold in experimental tests: offering a small payment may result in lower performance than not offering any payment. We test experimentally two main explanations that have been put forward for this result: the "incomplete contract" hypothesis views the payment rule as a signal given to subjects on purpose of the activity. The "informed principal" hypothesis views it as a signal concerning the characteristics of the agent or of the task. The incomplete contract view appears to offer the best overall explanation for our results. We also find that high-powered monetary incentives do not "crowd out" intrinsic motivation, but may elicit "too much" effort when intrinsic motivation is very high.
Abstract: We propose steps towards a theory of economic decision making based on the integration of classical decision theory and personality theory. The premise for the theory is the study of the correlation structure between experimental and empirical measures of economic preferences (the standard two-factor theory: attitude to risk and attitude to delayed payments) and a five-factor personality theory (the Big Five), and their predictive power for several key economic and life outcomes, on a large data set that contains information on all of these items for the same subjects.
Our results show that personality traits have a stronger predictive power than economic preferences for all the dependent variables, in particular for credit score, job persistence and heavy truck accidents. They also have strong predictive power for Body Mass Index (BMI) and smoking habit. These results show that the integration of the two theories provides the appropriate conceptual structure for understanding how personality traits affect economics preferences. The results open a clear way of disentangling the effects of cognitive and non cognitive skills on economic behavior and success. For example, cognitive skills, in particular IQ, explain a substantial part of the attitude to time preferences, while IQ together with Extraversion explain attitude to risk. A corollary of the theory is the explanation of how the interplay of cognitive and non cognitive factors can explain economic performance. For example, a very specific sub-facet of Conscientiousness is a particularly strong predictor of performance in Credit Risk and Accidents.
Abstract: Exploiting variation across communities in indices correlated with women emancipation, we show that in regions where women are less emancipated their average 2D4D Digit Ratio is lower than that of men compared to regions with higher indices, a finding is consistent with the existence of gender related obstacles into entrepreneurship.
This finding can explain why: a) fewer women than men are entrepreneurs; b) the proportion of women among entrepreneurs is higher in countries with higher women emancipation; c) women entrepreneurs show more masculine traits. Once women enter entrepreneurship, they are equally able than man
Abstract: Evidence from psychology and economics indicates that many individuals overestimate their ability, both absolutely and relatively. We test three different theories about observed relative overconfidence.
The first theory notes that simple statistical comparisons (for example, whether the fraction of individuals rating own skill above the median value is larger than half) are compatible with a Bayesian model of updating from a common prior and truthful statements. We show that such model imposes testable restrictions on relative ability judgments, and we test the restrictions. Data on 1,016 individuals' relative ability judgments about two cognitive tests rejects the Bayesian model.
The second theory suggests that self-image concerns asymmetrically affect the choice to get new information about one's abilities, and this asymmetry produces overconfidence. We test an important specific prediction of these models: individuals with a higher belief will be less likely to search for further information about their skill, because this information might make this belief worse. Our data also reject this prediction.
The third theory is that overconfidence is induced by the desire to send positive signals to others about one's own skill; this suggests either a bias in judgment, strategic lying, or both. We provide evidence that personality traits strongly affect relative ability judgments in a pattern that is consistent with this third theory. Our results together suggest that overconfidence in statements is most likely to be induced by social concerns than by either of the other two factors.
Abstract: Recent literature emphasizes the role that testosterone (T), as well as markers indicating early exposure to T and its organizing effect on the brain (such as the ratio of second to fourth finger, 2D:4D, have on performance in financial markets. These results may suggest that the main effect of T, either circulating or in fetal exposure, on economic behavior occurs through the increased willingness to take risks. However, other research indicate that traders with low digit ratio are not only more profitable, but more able to survive in the long run: so the effect is likely to consist of more than just lower risk aversion. In addition, recent literature suggests a positive correlation between intelligence and higher willingness to take risks.
To test these two hypotheses (simple effect on risk attitude, versus a complex effect involving risk attitude and intelligence) we gather data on the three variables, and show that low digit ratio is associated with higher risk taking and higher scores in intelligence tests in men. This explains both the higher performance and higher survival rate observed in traders, as well as a possible explanation of the observed correlation between intelligence and risk taking. This link holds only for men, suggesting a profound gender difference in the way these effects are organized.
We also analyze how much of the total effect of digit ration on risk attitude is direct, and how much is mediated by the effect on intelligence. Mediation Analysis shows that a substantial part of the effect on T on attitude to risk is mediated by intelligence.
Abstract: Merit and justice have a crucial role in ethical theory, and political philosophy. Some theories view as justice as allocation according to merit. Others view justice as holding criteria of its own and viewed as two opposite, independent values. We study experimentally their nature, and their relationship. In our experiment subjects play two games against the computer: a game of skill and a game of luck; after each game they observe the earnings of all subjects in the session. Each subject could reduce the winnings of one other person at a cost to himself.
The majority of subjects used the option to subtract. The decision to subtract and the amount subtracted depend both on whether the game was skill or luck, and the distance between the earnings of the subject and those of others. For fixed distance, subjects subtract more in luck than in skill. In skill games the subtraction becomes more likely, and the amount larger, as the distance increases. The results show that individuals consider favorable outcomes in luck as undeserved, ence they feel more justified to subtract. They instead consider positive outcomes (their own and others') in skill as signal of skill and effort, hence deserving merit; hence they feel more motivated to subtract. We conclude that merit is attributed if and only if effort or skill affect outcome, and inequality of outcomes is viewed differently depending on whether merit originates the difference or not. Thus, merit and justice are strongly linked in the perception of individuals, and they should be in the our concept of a good society.
Abstract: We study experimentally how males and females differ in the way same-gender peers observing their action affects their social behavior. In our experiment, people play a Prisoner’s Dilemma Game with a partisan audience watching the choice. Two groups of the same size (6-10 persons) participated in each session; these groups could be both all-male, both all-female, or one all-male and one all-female. Groups were separated into two rooms. Each person in the group played the game once with an audience of the same group (“at home”) and once with audience of the other group (“away”). Participants additionally received a 1/3 share of the active group member’s payoffs in games in which they made no choices.
Behavior is significantly affected by the interaction of gender and place: males cooperate substantially more often when away, while females cooperate substantially more often when at home. At home, females cooperate significantly more than males, and when away the cooperation rates are similar. We confirm the established result in the literature that there is no gender difference in aggregate cooperation rates in Prisoner’s Dilemma, but in our environment this is an artifact produced by the balance of two opposing forces.
We discuss a possible explanation for this pattern: Males and females wish to signal their in-group peers, but males wish to signal their formidability and females wish to signal their cooperativeness.
Cognitive skills affect economic preferences, strategic behavior, and job attachment, Supplementary Material
Abstract: Economic analysis has so far said little about how an individual’s cognitive skills (CS) are related to the individual’s economic preferences in different choice domains, such as risk-taking or saving, and how preferences in different domains are related to each other. Using a sample of 1,000 trainee truckers we report three findings. First, there is a strong and significant relationship between an individual’s CS and preferences. Individuals with better CS are more patient, in both short- and long-run. Better CS are also associated with a greater willingness to take calculated risks.
Second, CS predict social awareness and choices in a sequential Prisoner’s Dilemma game. Subjects with better CS more accurately forecast others’ behavior, and differentiate their behavior as a second mover more strongly depending on the first-mover’s choice.
Third, CS, and in particular, the ability to plan, strongly predict perseverance on the job in a setting with a substantial financial penalty for early exit. Consistent with CS being a common factor in all these preferences and behaviors, we find a strong pattern of correlation among them. These results, taken together with the theoretical explanation we offer for the relationships we find, suggest that higher CS systematically affect preferences and choices in ways that favor economic success.