Abstract
Recent experimental evidence suggests that noisy behavior correlates strongly with personal characteristics. Since decision noise leads to bias in most elicitation tasks, there is a risk of falsely interpreting noise-driven relationships as preference driven. This puts previous studies that found a negative relation between personality measures and risk aversion into perspective and in particular raises the question of how to achieve robust inference in this domain. This paper shows, by way of an economic experiment with subjects from all walks of life, that using structural estimation to model heterogeneity of noise in combination with a balanced design allows us to mitigate the bias problem. Our estimations show that cognitive ability is related to noisy behavior rather than risk preferences. We also find age and education to be strongly related to noise, but the personality characteristics obtained using the Big Five inventory are less related to noise and more robustly correlated to risk preferences.
Highlights
To err is human, as the proverb says, but the empirical fact is that some people are more likely to err than others
We find no relation between risk preferences and cognitive ability when we use a more balanced experimental design together with an econometric specification that allows noise to depend on covariates
Consistent with our argument, we find a strong association between cognitive ability and the noise parameters
Summary
As the proverb says, but the empirical fact is that some people are more likely to err than others. Chapman et al (2018) propose a dynamic estimation method that tries to minimize the effect of noise on estimated preferences by using Bayesian methods to optimally select decision tasks They find that the consistency of subjects’ choices in MPLs affects the correlation between cognitive abilities and estimated risk preferences which supports the results presented here. Any method of statistical inference that does not take the heterogeneity of noise into account finds a spurious negative correlation between cognitive ability and risk aversion, despite the fact that both types have the same true risk preferences. It produces a positive (or no) correlation between cognitive ability and risk aversion under the simple error structure described above.
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