The Relationship Between Economic Preferences and Psychological Personality Measures

ABSTRACT
The Relationship Between Economic Preferences and Psychological Personality Measures*

Although both economists and psychologists seek to identify determinants of heterogeneity in behavior, they use different concepts to capture them. In this review we first analyze the extent to which economic preferences and psychological concepts of personality – such as the Big Five and locus of control – are related. We analyze data from incentivized laboratory experiments and representative samples and find only low degrees of association between economic preferences and personality. We then regress life outcomes – such as labor market success, health status and life satisfaction – simultaneously on preference and personality measures. The analysis reveals that the two concepts are rather complementary when it comes to explaining heterogeneity in important life outcomes and behavior.

JEL Classification: C91, D01, D80, D90, I00, J30, J62


Keywords: risk preference, time preference, social preferences, locus of control, Big Five
Corresponding author:
Armin Falk
Department of Economics
University of Bonn
Adenauerallee 24-42
53113 Bonn
Germany
E-mail: armin.falk@uni-bonn.de
*

Daniel Goldstein TED talk on resolving tensions between current and future selves

Excellent TED talk by Daniel Goldstein who spoke at Geary Institute a few years back. He gives an overview of the basic idea behind commitment devices and puts forward visualisation as a potential mechanism of resolving undersaving

Short-Termism, Patience and Finance

As a popular open-source encyclopedia states, time preference pertains to how large a premium a consumer places on enjoyment nearer in time over more remote enjoyment. Some readers may be more used to thinking of this as "patience"; which the same open-source encyclopedia tells us is "the state of endurance under difficult circumstances, which can mean persevering in the face of delay or provocation without acting on annoyance/anger in a negative way; or exhibiting forbearance when under strain, especially when faced with longer-term difficulties." So there is an obvious overlap between these concepts: illustrated well by the Stanford Marshmallow Experiment.

I have elaborated on the above because I recently read a paper on time preference in the domain of finance, with the following title: "Patience and Finance". This was essentially a speech delivered last year by Andrew Haldane, the Executive Director for Financial Stability at the Bank of England. I became aware of the paper after doing a key-word search for "patience" -- and then discovering a link to Haldane's speech on the Corporate Law and Governance blog. That blog-post also describes a lecture delivered by Haldane in May of this year, as follows:

"In the lecture - titled "The short long" and available here (pdf) - Mr Haldane notes the (relative) paucity of studies on short-termism in capital markets. He argues, on the basis of his empirical research, that short-termism is statistically and economically significant in capital markets and appears to be increasing. In response to this finding of market failure, Mr Haldane identifies possible public policy responses including those concerning transparency, governance, contract design and taxation."

I googled "short-termism" to find more material on the problem; and found this Telegraph artcle from last year: "Vince Cable was right on the evil of short-termism". The Telegraph article states that: "humans are seemingly hard-wired for short-termism and, worse, they make poorer decisions the more short-term they become. Ask someone if they prefer £10 in a year or £11 in a year and a day and they will, rightly, opt for the £11. But ask them if they would prefer £10 today or £11 tomorrow and they will invariably put out their hand for the money straight away." This is of course, the classic hyperbolic discounting example.

The Telegraph article also tackles the question of why the financial services industry has become fixated on short-term performance: "Companies which used to announce figures twice a year now feel the need to do so quarterly. Fund managers are judged on ever-shorter timescales and unsurprisingly start to play it safe, hugging benchmarks and avoiding the long-term judgements that may be right but won't necessarily come good before the next review. As Keynes observed way back in 1936: 'Investment based on genuine long-term expectation is so difficult today as to be scarcely practicable'."

Of course, the recent speech (and lecture) by Andrew Haldane indicates that the quote from Keynes rings true very much today. Even though there has been talk about long-term incentive plans and "long-term bonuses" for the financial sector, it remains unclear to me if anything substantial is being done to reduce the extent of short-termism in finance. However, there is laboratory evidence on the benefits of improving incentive structures, produced 20 years ago at this stage: "Behavioral Consequences of Corporate Incentives and Long-Term Bonuses: An Experimental Study". There is even a recent book with chapters on 'Investment Management Short-Termism' and 'Long-Term Performance Incentives for Investment Managers': "Saving Capitalism From Short-Termism: How to Build Long-Term Value and Take Back Our Financial Future".

To finish, I will ask if any reader has ever heard of the term IBGYBG? Apparently it is "a text-messaging acronym, like LOL or OMG. It was shorthand for a phrase often used in the investment banking business during the run-up to the 2008 Great Financial Crisis". It meant: "I’ll be gone; you’ll be gone". Now that is all about the short-term.

Health, Education and Time Preferences

Differentials in time preferences and related constructs are frequently invoked as unobserved potential reasons for socioeconomic gradients in economic outcomes. However, there is much less work actually measuring this. A number of recent papers have shown that measures of time preferences are predictive of various different types of behaviours and outcomes (see e.g. some papers involving me and colleagues here and here). However, there are no papers I am aware of that show that such factors can explain social gradients. A recent paper below by Van der Pol in Health Economics finds that controlling for measures of risk and time preference explains only a small fraction of the education gradients in health. I think this is an important result, which bears out the importance of thinking further about what is actually transmitted from parents to children in terms of determining their economic and health outcomes.

Health, Education and Time Preferences
Abstract
Education has been shown to be the most important correlate of health. However, the mechanism through which education influences health has been largely unexplained. Grossman argued that education improves health production efficiency. In contrast, Fuchs argued that the association between health and education is not primarily causal but reflects unobserved causes of both outcomes. Instead of education causing better health, some ‘third’ variables may be related to both education and health. The ‘third’ variable most frequently mentioned is time preference. The aim of this paper is to investigate the role of time preference in the relationship between education and health. The role of risk attitude is also investigated. The paper exploits a unique data set of households that incorporated stated preference questions eliciting individuals' time preferences. The results show that the effect of education reduces but does not disappear when controlling for individuals' time preferences. Copyright © 2010 John Wiley & Sons, Ltd.

Socioeconomic differences in early childhood time preferences

Socioeconomic differences in early childhood time preferences
Liam Delaneya, , , Orla Doyleb

a UCD Geary Institute, UCD School of Economics, & UCD School of Public Health and Population Science, University College Dublin
b UCD Geary Institute & UCD School of Public Health and Population Science, University College Dublin
Received 13 June 2009; revised 24 June 2011; Accepted 31 August 2011. Available online 17 September 2011.

Abstract
This article examines the extent to which early childhood socioeconomic differences emerge in hyperactivity, impulsivity and persistence, all of which are psychometric analogues to how economists conceptualise time discounting. We control for a wide range of factors including parental investment and proxies for maternal time preferences. Our results show substantial social class variations across measures at age 3. We find weak evidence that these measures are predicted by differential maternal behaviours (e.g. savings behaviour, smoking) but relatively stronger evidence that these traits are transmitted through the parents’ own non-cognitive skills (self-esteem, attachment) and parental time investments (time spent reading to the child and teaching the child to write, sing).

Highlights
► This paper examines socioeconomic differences in proxies for time preferences among 3-year old children. ► It finds marked socioeconomic differences across a wide range of measures of time preferences. ► Variables such as maternal depression and attachment, parental inputs and maternal behaviours also predict child time preferences. ► However, even controlling for this wide range of covariates, a large socioeconomic gradient exists. ► Further research should examine the extent to which child preferences are exogenously shaped by parental factors and home environments.

Keywords: D03 Behavioural Economics; D9 Intertemporal Choice

IZA Paper: Stability of Time Preferences

Stability of Time Preferences
Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Meier, Stephan (sm3087@columbia.edu) (Columbia University)
Sprenger, Charles (csprenge@ucsd.edu) (University of California, San Diego)

Additional information is available for the following registered author(s):

Stephan Meier
Abstract

Individuals frequently face intertemporal decisions. For the purposes of economic analysis, the preference parameters assumed to govern these decisions are generally considered to be stable economic primitives. However, evidence on the stability of time preferences is notably lacking. In a large field study conducted over two years with about 1,400 individuals, time preferences are elicited using incentivized choice experiments. The aggregate distributions of discount factors and the proportion of present-biased individuals are found to be unchanged over the two years. At the individual level, the one year correlations in measured time preference parameters are found to be high by existing standards, though some individuals change their intertemporal choices potentially indicating unstable preferences. By linking time preference measures to tax return data, we show that identified instability is uncorrelated with socio-demographics and changes to income, future liquidity, employment and family composition.

Consideration of future consequences

Consideration of future consequences scale: Confirmatory Factor Analysis

D. Hevey, M. Pertl, K. Thomas, L. Maher, A. Craig and S. Ni Chuinneagain

Trinity College Dublin, Dublin 2, Ireland

Personality and Individual Differences
Volume 48, Issue 5, April 2010, Pages 654-657

Abstract:

Individual differences in the Consideration of Future Consequences (CFC) are typically assessed using the 12-item scale developed by Strathman, Gleicher, Boninger, and Edwards (1994). However, in contrast to the unidimensional model proposed by the scale developers, recent factor analyses have produced two-dimensional models of the scale. Confirmatory factor analyses were used in this study to evaluate different 1- and 2-factor models based on data provided by 590 (236 males, 354 females) young adult members of the general public. Although some alternative models showed promise, the 12-item single factor model with method effects associated with positively and negatively worded items provided best fit. Implications for the assessment of CFC are considered.

Keywords: Consideration of future consequences; Confirmatory Factor Analysis; Method effects

Netzer AER - Evolution of Time Preferences and Attitude Toward Risk

Evolution of Time Preferences and Attitudes toward Risk

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Author Info

Nick Netzer
Additional information is available for the following registered author(s):

• Nick Netzer

Abstract

This paper explores a general model of the evolution and adaption of hedonic utility. It is shown that optimal utility will be increasing strongly in regions where choices have to be made often and decision mistakes have a severe impact on fitness. Several applications are suggested. In the context of intertemporal preferences, the model offers an evolutionary explanation for the existence of conflicting short- and long-run interests that lead to dynamic inconsistency. Concerning attitudes toward risk, an evolutionary explanation is given for S-shaped value functions that adjust to the decision maker's environment. (JEL D81, D83)

Tanaka, Camerer and Nguyen AER - Eliciting Risk and Time Preferences

Risk and Time Preferences: Linking Experimental and Household Survey Data from Vietnam

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Author Info

Tomomi Tanaka
Colin F. Camerer
Quang Nguyen

Abstract

We conducted experiments in Vietnamese villages to determine the predictors of risk and time preferences. In villages with higher mean income, people are less loss-averse and more patient. Household income is correlated with patience but not with risk. We expand measurements of risk and time preferences beyond expected utility and exponential discounting, replacing those models with prospect theory and a three-parameter hyperbolic discounting model. Comparable risk parameter estimates have been found for Chinese farmers, using our method. (C83, D12, O12, P38)

A Message to You

Its amazing that this reggae/ska intertemporal choice anthem has remained off the blog for so long. My time preferences lecture may involve some singing this term.

Marshmallow Experiments

Anyone around here either physically or online will have heard of the famous Mischel Marshmallow experiments that examined the patience of children, measured by their ability to delay consumption of a marshmallow in exchange for getting two marshmallows later on. We tried to replicate them here but we kept eating the marshmallows before we could recruit the participants.

Nudge blog has a description of the famous experiments along with some video - link here

Time preferences: a role for birth order effects?

There are zillions of papers on birth order effects. A possible effect on time preference is an interesting possibility:

Sibling and birth-order effects on time-preferences and real-life decisions Lampi, Elina & Nordblom, Katarina

Survey data is used to investigate whether siblings and birth order can explain differences in stated time preferences and in some real-life decisions of intertemporal nature, namely whether one obtains a university education, whether one moves in with a partner at an early age, and when one has children. We also study earnings. Middleborns are found to be the least patient in terms of stated time preferences. First-borns, on the other hand, are more patient in real-life decisions than later-borns: they are more likely to obtain a university education and have higher earnings. Interestingly, those who have siblings but did not grow up with them are the least patient in family related real-life decisions. We also find that the more siblings one grew up with, the more impatient one is in the studied real-life decisions.
http://d.repec.org/n?u=RePEc:hhs:gunwpe:0388&r=cbe

Discounting and Climate Change

"Discounting for Climate Change"
Author(s):
Anthoff, David / Tol, Richard S J / Yohe, Gary W. (Wesleyan University, Middletow)

Abstract:
It is well-known that the discount rate is crucially important for estimating the social cost of carbon, a standard indicator for the seriousness of climate change and desirable level of climate policy. The Ramsey equation for the discount rate has three components: the pure rate of time preference, a measure of relative risk aversion, and the rate of growth of per capita consumption. Much of the attention on the appropriate discount rate for long-term environmental problems has focussed on the role played by the pure rate of time preference in this formulation. We show that the other two elements are numerically just as important in considerations of anthropogenic climate change. The elasticity of the marginal utility with respect to consumption is particularly important because it assumes three roles: consumption smoothing over time, risk aversion, and inequity aversion. Given the large uncertainties about climate change and widely asymmetric impacts, the assumed rates of risk and inequity aversion can be expected to play significant roles. The consumption growth rate plays multiple roles, as well. It is one of the determinants of the discount rate, and one of the drivers of emissions and hence climate change. We also find that the impacts of climate change grow slower than income, so the effective discount rate is higher than the real discount rate. Moreover, the differential growth rate between rich and poor countries determines the time evolution of the size of the equity weights. As there are a number of crucial but uncertain parameters, it is no surprise that one can obtain almost any estimate of the social cost of carbon. We even show that, for a low pure rate of time preference, the estimate of the social cost of carbon is indeed arbitrary—as one can exclude neither large positive nor large negative impacts in the very long run. However, if we probabilistically constrain the parameters to values that are implied by observed behaviour, we find that the expected social cost of carbon, corrected for uncertainty and inequity, is approximate 60 US dollar per metric tonne of carbon (or roughly $17 per tonne of CO2) under the assumption that catastrophic risk is zero.

The Development of Personality Over the Life Cycle

Bart Golsteyn will be giving a seminar at 1pm in Geary tomorrow on "Economics and Personality." Borgahns and Golsteyn (2008) have done some work with the DBN Dutch panel data to examine whether changes in personality are related to changes in outcomes and/or specific events and activities during the life cycle.

They report that individuals become more extraverted, conscientious and emotionally stable across the life course. Openness to experience has a hump-shaped relation with age. Risk aversion increases dramatically after adolescence but remains relatively stable thereafter. They also report that individuals who start their college education become more extraverted and agreeable but less emotionally stable and conscientious.

In addition, Borgahns and Golsteyn report that time preference has a U-shaped relation with age: adolescents have very high time preference, then at 36 years of age time preference reaches its minimum, after which it increases again. This is the first longitudinal evidence that we know exists on time preferences. As we mentioned on the blog before, no longitudinal study has previously measured the mean-level stability of time preference over the life cycle, according to Frederick et al. (2002).

Time Preferences and Drinking in 18th Century Killarney

"Ale" I will lavishly order, and drinks to the counter
and I'll save not a halfpenny pay till the day that I die

From "Seamus light-hearted and loving friend of my breast' by Eoghan Rua O Suilleabhain, Killarney poet from the late 1700s.

Discount Rates in the Field and the Lab

Another NBER working paper below examines discount rates in lab tasks and correlates them with "field" measures of discount rates. They find that the lab-elicited discount rate correlates less than 0.28 with all field measures of discounting such as different types of financial behaviour etc., though they argue that elicited discount rates are more predictive than demographic variables in predicting behaviour. Worth comparing this to the study we did this year which examined how well discount rates were predicted by common personality and psychometric inventories. We find evidence of correlations with heart rate variability, systolic blood pressure, self-control, extraversion, consideration of future consequences and experiential avoidance. As in the Chabris et al paper, all correlations are below 0.29.


http://papers.nber.org/papers/w14270


http://ftp.iza.org/dp3674.pdf

Chabris, Laibson, Morris, Schuldt, Taubinsky

---- Abstract -----

We estimate discount rates of 555 subjects using a laboratory task and find that these individual discount rates predict inter-individual variation in field behaviors (e.g., exercise, BMI, smoking). The correlation between the discount rate and each field behavior is small: none exceeds 0.28 and many are near 0. However, the discount rate has at least as much predictive power as any variable in our dataset (e.g., sex, age, education). The correlation between the discount rate and field behavior rises when field behaviors are aggregated: these correlations range from 0.09-0.38. We present a model that explains why specific intertemporal choice behaviors are only weakly correlated with discount rates, even though discount rates robustly predict aggregates of intertemporal decisions.

NBER Paper on Evolution and Time Preferences

From the NBER site.

http://papers.nber.org/papers/w14185

The Evolutionary Theory of Time Preferences and Intergenerational Transfers

At each age an organism produces energy by foraging and allocates this energy among reproduction, survival, growth, and intergenerational transfers. We characterize the optimal set of allocation decisions that maximizes reproductive fitness. Time preference (the discount rate) is derived from the marginal rate of substitution between energy obtained at two different times or ages in an individual’s life, holding reproductive fitness constant. We show that the life history may have an initial immature phase during which there is body growth but no fertility, and a later mature phase with fertility but no growth, as with humans. During the immature phase, time preference depends only on the compounding effect of body growth, much like returns on a capital investment, but not on fertility, or the intrinsic population growth rate. During the mature phase, time preference depends on the costliness of fertility, and on endogenous survival and intrinsic growth rate, and not at all on body growth. During the transition between the two phases, fertility, mortality, body growth, and intrinsic growth rate all matter. Using these results, we conclude that time preference and discount rates are likely to be U-shaped across age. We compare our results to Hansson and Stuart (1990), Rogers (1994, 1997) and Sozou and Seymour (2003). Wastage and inefficiencies aside, in a single sex model a system of intergenerational transfers yields Samuelson’s (1958) biological interest rate equal to the population growth rate. When the rate of time preference exceeds this biological rate, inter- generational transfers will raise fitness and evolve through natural selection, partially smoothing out the age variations in time preference.