Sunday, May 13, 2007

Behavioral Economics and IQ   posted by Herrick @ 5/13/2007 06:13:00 PM

We all know that homo economicus fails as a complete description of human behavior, as the new field of behavioral economics makes abundantly clear. So while the homo economicus model does a good job explaining things like the interaction of supply and demand, the random walk nature of stock prices, and photo #16, it misses quite a lot of important facts about human behavior. By now, there's a rich literature on this, and any book you can find on the subject by Bowles, Camerer, or Thaler would give a good overview.

But of course, both h. economicus and h. behavioralis are ideal types--and so the question arises: Are some people more behavioral than others? Are some people more economistic that others? And is there any simple way to predict who will fit into which part of the spectrum?

Economists have started working on this question over the last few years, and right now I'll just stick to one small issue: Patience. The behavioralists have done a good job proving that people are generally much less patient than economic models predict. And recent work seems to show that smarter people are quite a bit more patient, a fact that may have important social implications.

In a recent study, Benjamin and Shapiro found that among Harvard undergrads, "A one-standard-deviation increase in mathematical performance raises the propensity to be patient by 18 percentage points, relative to a base of 28%." So if math scores rise by two standard deviations, patience more than doubles. Their summary:

In two laboratory studies [with Harvard students and Chilean high school students], we show directly that cognitive ability is associated with more standard time and risk preferences.

And what does "standard" mean to Benjamin and Shapiro? More like h. economicus.

Shane Fredrick of MIT showed much the same in this quite readable paper. He has a nice review of the earlier literature and in his own experiments found that "[t]hose who scored higher on the [cognitive reflection test] were generally more 'patient.'"

Both of those papers involve experiments with students playing for small sums of cash. This paper, published in what is arguably the top journal in economics, showed that when people were making decisions involving thousands of dollars, people with higher AFQT scores were much more patient.

The military drawdown program of the early 1990s provides an opportunity to obtain estimates of personal discount rates based on large numbers of people making real choices involving large sums. The program offered over 65,000 separatees the choice between an annuity and a lump-sum payment. Despite break-even discount rates exceeding 17 percent, most of the separatees selected the lump sum--saving taxpayers $1.7 billion in separation costs. Estimates of discount rates range from 0 to over 30 percent and vary with education, age, race, sex, number of dependents, ability test score, and the size of payment.

And when officers were broken down by careers, who were the most patient?


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