Abstract
Rationality is a fundamental pillar of Economics. It is however unclear if this assumption holds when decisions are made under stress. To answer this question, we design two laboratory experiments where we exogenously induce physiological stress in participants and test the consistency of their choices with economic rationality. In both experiments we induce stress with the Cold Pressor test and measure economic rationality by the consistency of participants’ choices with the Generalized Axiom of Revealed Preference (GARP). In the first experiment, participants delay the decision-making task for 20 min until the cortisol level peaks. We find significant differences in cortisol levels between the stressed group and the placebo group which, however, do not affect the consistency of choices with GARP. In a second experiment, we study the immediate effect of the stressor on rationality. Overall, results from the second experiment confirm that rationality is not impaired by the stressor. If anything, we observe that compared to the placebo group, participants are more consistent with rationality immediately after the stressor. Our findings provide strong empirical support for the robustness of the economic rationality assumption under physiological stress.
Highlights
The concept of rationality holds a central role in modern economic theory (Sugden 1991)
We find that physiological stress significantly increases participants’ cortisol levels but does not change the consistency of their choices with Generalized Axiom of Revealed Preferences (GARP)
We introduce three indexes which provide different measures of the consistency of choices with GARP: the Houtman and Maks Index (HMI), which measures the largest subset of choices consistent with GARP, the Critical
Summary
The concept of rationality holds a central role in modern economic theory (Sugden 1991). Each of the fifty decision problems differ in the rate at which participants could transfer money from one account to the other and in the total amount of money to allocate These variations generate a rich dataset that we use to assess how consistent individuals’ choices are with GARP (Choi et al 2007a, b, 2014). In order to test for such effects, we conduct a second experiment where we use the same protocol of the first experiment but we eliminate the time gap between the stressor and the decision-making task The results of this second experiment by and large confirm that stress has no significant negative impact on economic rationality, even when participants start making decisions right after experiencing a stressor.
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