Papers on Personality and Economics

Three recent published papers that we have worked on incorporate personality in understanding economic behaviour (here here and here ) and a number of working papers are currently in review (e.g. here and here )

In general, this is an area that is attracting substantial interest and it will be very interesting to see it develop in the next ten years. Below are some papers that are essential reading on the topic:

Almlund, Mathilde & Duckworth, Angela Lee & Heckman, James J. & Kautz, Tim, 2011. "Personality Psychology and Economics," IZA Discussion Papers 5500, Institute for the Study of Labor (IZA).

Borghans, Lex & Golsteyn, Bart & Heckman, James J. & Humphries, John Eric, 2011. "Identification Problems in Personality Psychology," IZA Discussion Papers 5605, Institute for the Study of Labor (IZA).

James J. Heckman, 2011. "Integrating Personality Psychology into Economics," NBER Working Papers 17378, National Bureau of Economic Research, Inc.

Lex Borghans & Angela Lee Duckworth & James J. Heckman & Bas ter Weel, 2008. "The Economics and Psychology of Personality Traits," Journal of Human Resources, University of Wisconsin Press, vol. 43(4).

IZA PaperL: 6470 The Relationship Between Economic Preferences and Psychological Personality Measures

by Becker, Anke & Deckers, Thomas & Dohmen, Thomas & Falk, Armin & Kosse, Fabian

Toward the Integration of Personality Theory and Decision Theory in the Explanation of Economic Behavior

Jon Anderson,a Stephen Burks,b Colin DeYoung,c and Aldo Rustichinid,e

Version 1.2 (Preliminary).

New IZA Working Paper: Family Background, Self-Confidence and Economic Outcomes

IZA DP No. 6117

Antonio Filippin, Marco Paccagnella:

Family Background, Self-Confidence and Economic Outcomes

Abstract:
In this paper we analyze the role played by self-confidence, modeled as beliefs about one's ability, in shaping task choices. We propose a model in which fully rational agents exploit all the available information to update their beliefs using Bayes' rule, eventually learning their true type. We show that when the learning process does not convergence quickly to the true ability level, even small differences in initial confidence can result in diverging patterns of human capital accumulation between otherwise identical individuals. As long as initial differences in the level of self-confidence are correlated with the socioeconomic background (as a large body of empirical evidence suggests), self-confidence turns out to be a channel through which education and earnings inequalities are transmitted across generations. Our theory suggests that cognitive tests should take place as early as possible, in order to avoid that systematic differences in self-confidence among equally talented people lead to the emergence of gaps in the accumulation of human capital.

http://ftp.iza.org/dp6117.pdf

Almlund, Duckworth, Heckman and Kautz IZA Paper: Personality Psychology and Economics

Personality Psychology and EconomicsAuthor info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Almlund, Mathilde (almlund@uchicago.edu) (University of Chicago)
Duckworth, Angela Lee (duckwort@psych.upenn.edu) (University of Pennsylvania)
Heckman, James J. (jjh@uchicago.edu) (University of Chicago)
Kautz, Tim (tkautz@uchicago.edu) (University of Chicago)

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

Mathilde Almlund
James J. Heckman
Abstract

This paper explores the power of personality traits both as predictors and as causes of academic and economic success, health, and criminal activity. Measured personality is interpreted as a construct derived from an economic model of preferences, constraints, and information. Evidence is reviewed about the "situational specificity" of personality traits and preferences. An extreme version of the situationist view claims that there are no stable personality traits or preference parameters that persons carry across different situations. Those who hold this view claim that personality psychology has little relevance for economics. The biological and evolutionary origins of personality traits are explored. Personality measurement systems and relationships among the measures used by psychologists are examined. The predictive power of personality measures is compared with the predictive power of measures of cognition captured by IQ and achievement tests. For many outcomes, personality measures are just as predictive as cognitive measures, even after controlling for family background and cognition. Moreover, standard measures of cognition are heavily influenced by personality traits and incentives. Measured personality traits are positively correlated over the life cycle. However, they are not fixed and can be altered by experience and investment. Intervention studies, along with studies in biology and neuroscience, establish a causal basis for the observed effect of personality traits on economic and social outcomes. Personality traits are more malleable over the life cycle compared to cognition, which becomes highly rank stable around age 10. Interventions that change personality are promising avenues for addressing poverty and disadvantage.

Personality Traits and Economics

The Borghans et al (2008) Journal of Human Resources paper is cited over 200 times at this stage and is likely to be one of the most cited papers ever published in the journal (the famous Blinder decomposition paper has over 2000 citations but is nearly 40 years old). Almlund, Duckworth, Heckman and Kautz have written another extensive paper developing the literature on personalilty and economics linked here.

Talk on Genetics and Personality Tomorrow (Wednesday) Night

Topic: ISS talk Wednesday 9th February

Irish Skeptics Feb 08 09:05PM ^

Dear all,

I am writing to remind you that our 2011 lecture series begins tomorrow
night, Wednesday 9th February, with a talk by Dr Kevin Mitchell of the Dept
of Genetics, Trinity College Dublin, who will give a presentation entitled:

*Born that way - how the wiring of the brain makes us who we are*
Time: 8:00pm
Where: Davenport Hotel, Merrion Square, Dublin 2.
Admission: €3 for members and concessions; €6 for non-members.

Hope you can make it,

With Best Wishes,
Noirin Buckley
on behalf of the ISS

Description:

Dr Kevin Mitchell heads up a lab specialising in developmental neurogenetics. He previously presented to the Irish Skeptics Society during April last on the genetics of perception. The response at the time was so overwhelmingly positive that we have decided to invite him back. This time he will examine how genetic and neurodevelopmental variation affects how the brain is wired, which in turn has a predominant influence on major personality traits and other psychological characteristics. He will also comment on how nature interacts with nurture.

The Grand Challenges of Personality and Individual Differences for Social, Behavioral and Economic Science

Written on behalf of the Association for Research in Personality. Document available here: NSF Grand Challenge.

Abstract. Individuals respond differently to social situations, economic circumstances, and physical environments, with important consequences for physical and mental health, occupational attainment, economic well‐being, community involvement, and mortality itself. The key questions in the psychological study of personality and individual differences are: What are the primary dimensions of personality and ability how can they best be measured? What are the origins of these individual differences? What are the psychological processes that underlie individual differences in personality? To what degree and in what ways is personality stable, variable, and changeable across the lifespan? What are the behavioral implications of personality and how do these implications vary with situational circumstances? What are the long‐term implications of personality for important life outcomes and how do these implications vary according to the nature of physical, social and cultural environment? Personality psychology is a “hub” discipline that stands at the crossroads of social psychology and economics, and also cognitive science, developmental psychology, health psychology, and biology. The key questions of personality psychology thus are both foundational and potentially transformative of broad areas of social science.

The Psychology of Facebook

Of the 20 most popular websites in the world, 13 relate to corporations that have European headquarters in Ireland: Ebay, Google, Yahoo and Facebook. The last three of these corporations have been the source of much commentary on this blog. Facebook (FB) has 1.5 millions users in Ireland and it is competing strongly with Google for web-user time-allocation. The chart below (from comScore/Citi) shows FB's increasing share of web-user time-allocation since 2006. FB has an explicit interest in internet economics and it has been mentioned many times before on this blog: from ambient awareness to the App Economy, FB search data to Mulley Com's study of FB eye-tracking, the choice architecture of FB, the FB Global Happinness Index, and of course, the debate on whether FB-use hurts students' grades.


Earlier this week in the Irish Times, Eoin Burke Kennedy wrote an interesting article about the psychology of FB. "Extroverted people tend to have more friends on Facebook but reveal less about themselves while introverts disclose more personal details but to a smaller group." Extraversion is one of the Big 5 personality traits: often discussed on this blog in the context of non-cognitive ability. Here and here, for example. The Big 5 personality traits have also been discussed on this blog before - in relation to social networking and web-users' choice of email address. Readers who find these topics interesting may want to read about the developing field of cyberpsychology - this subject encompasses all the psychological phenomena that are associated with or affected by emerging technology.

The content of the Irish Times article (mentioned above) is based on work by Dublin Business School psychologist Dr Ciarán McMahon. "McMahon has conducted an extensive review of the psychological literature on Facebook to better understand what makes it tick". McMahon runs a blog, PsychBook Research, which links to one of his recent presentations: "Facebook and psychology: What we know so far". While the Geary Blog has often mentioned the career opportunities for economists in corporations such as Google, Yahoo, and Microsoft; and opportunities for applied economists in private sector firms such as Netflix, SeatGeek, Yapta, Inon and Nielsen; opportunities for psychologists seem likely in Facebook, and in other Web 2.0 commerce.

Early Manifestations of Personality and Adult Health

Another study linking childhood personality to later health this time by Laura Kubzansky and colleagues in this months issue of Health Psychology:

"Children with high attention reported better self-rated health and fewer illnesses as adults; more distress-prone children reported worse self-rated health and more illnesses as adults."

Studies showing personality linkages to mortality (e.g. Friedman et al., 1993) have a strong design as they use an objective outcome measure and avoid many possible confounds in self-report measures. By using self-rated health or illnesses it's always possible that what we're seeing is distress prone people complaining more and rating their health as bad and illnesses as more frequent and severe. Controlling for adult personality and health behaviours helps to specify if early personality is important due to it's link to fundamental biological processes or due to it's influence on a trajectory of personlity and behaviour over the lifespan. I didn't see this in the Kubzansky study. However, it is supported by a series of studies point to childhood distress, neuroticism, instabiliy as risk factors for later illness and premature mortality and to conscientiousness, self-regulation, dependability etc. as protective. The biggest challenge at the moment is to test the potential causal linkages that may exist between personality, life-events and health. Potential pathways are outlined well in an article by Timothy Smith in Perspectives on Psychological Science.

The Labor Market Returns to Cognitive and Noncognitive Ability: Evidence from the Swedish Enlistment

Lindqvist, Erik (Research Institute of Industrial Economics (IFN))
Westman, Roine (New York University)

IFN Working Paper No. 794, 2009

We use data from the military enlistment for a large representative sample of Swedish men to assess the importance of cognitive and noncognitive ability for labor market outcomes. The measure of noncognitive ability is based on a personal interview conducted by a psychologist. Unlike survey-based measures of noncognitive ability, this measure is a substantially stronger predictor of labor market outcomes than cognitive ability. In particular, we find strong evidence that men who fare badly in the labor market in the sense of long-term unemployment or low annual earnings lack noncognitive but not cognitive ability. We point to a technological explanation for this result. Noncognitive ability is an important determinant of productivity irrespective of occupation or ability level, though it seems to be of particular importance for workers in a managerial position. In contrast, cognitive ability is valuable only for men in qualified occupations. As a result, noncognitive ability is more important for men at the verge of being priced out of the labor market.

Using Measures of Non-Cognitive Ability in Economics

Cognitive ability (as measured by test scores) only determines part of a person's success in the labour market. This came into sharp focus in the economics profession at the 2001 meeting of the American Economics Association. At this meeting a number of papers were presented about the importance of non-cognitive ability (also referred to by some authors as 'non-cognitive skills'). An example is Heckman and Rubinstein (2001) who mention non-cognitive skills such as "persistence, reliability and self-discipline". Most often though, the phrasing of "non-cognitive ability" is used, for example: Heckman, Stixrud and Urzua (JLE, 2006): "The Effects of Cognitive and Noncognitive Abilities on Labour Market Outcomes and Social Behavior."

Heckman and Rubinstein (2001) identified the importance of non-cognitive abilities with their observation that high school equivalency recipients earn less than high school graduates despite the fact that the high school equivalency recipients are smarter. They attribute this to the negative non-cognitive attributes of equivalency recipients originally dropping out. Their conclusion is that individuals with higher amounts of persistence and self-discipline may be more likely to attain academic qualifications.

In relation to further evidence, Heckman, Stixrud and Urzua (2006) model the influence of young individuals' cognitive and non-cognitive abilities on schooling and earnings. They find that better non-cognitive abilities lead to more schooling, but also have an earnings return over and above this. Kern and Friedman (2008) de-compose (overall) conscientiousness into a range of non-cognitive abilities, including persistence, industriousness, organisation and discipline (read previous blog discussion on this here).

The trait of conscientiousness is taken from the "Big Five" set of personality characteristics. Kyllonen, Walters and Kaufman (2005) review the literature on noncognitive constructs (such as the "Big Five"), and conclude with a discussion of how non-cognitive constructs (or personality factors) might be used in admissions and guidance applications for graduate education (read previous blog discussion on this here).

Braakmann (2009) has used the German Socio-Economic Panel to show that differences in various non-cognitive traits, specifically the Big Five, contribute to gender inequalities in wages and employment (this was previously mentioned on the blog here). Mueller and Plug (2004) shows that the labour market values conscientiousness and openness to experience for women (previous discussion on the blog here --- in relation to non-cognitive personality, education and earnings).

Kyllonen (2008) is perhaps the most detailed assessment of how to measure non-cognitive abilities; he associates the non-cognitive abilities shown below with the "Big Five" personality traits. Kyllonen is based at the Princeton Educational Testing Service (ETS) and put forward the framework below ("Enhancing Noncognitive Skills to Boost Academic Achievement") at a 2008 Washington conference entitled 'Educational Testing in America: State Assessments, Achievement Gaps, National Policy and Innovations'.

The Personality Project

The personality project is a cooperative endeavour for and by all interested in the study of personality. Issues of personality appeal to everyone and there are many interesting web sites that can be visited both inside and outside of academia. For more dtails, follow this link.

Also, William Revelle from the Department of Psychology at Northwestern University has made the following course on psychometric theory (with applications in R) freely available: http://personality-project.org/r/book/

Personality and Life Expectancy (Conscientiousness and Non-Cognitive Skills)

Following on from growing evidence that higher levels of conscientiousness are associated with greater health protection, Kern and Friedman (2008) show that conscientious individuals tend to live longer. Associations with longevity were strongest for the achievement (persistent, industrious) and order (organised, disciplined) facets of conscientiousness.

This suggests that there may be links between longevity and what economists refer to as non-cognitive skills. Even more interesting is the approach taken to de-compose (overall) conscientiousness into a range of non-cognitive skills, including persistence, industriousness, organisation and discipline.

The importance of concientiousness is also documented by Terracciano et al (2008). Furthermore, this study shows that the association of personality traits with longevity is largely independent from the influence of smoking and obesity; longevity was associated with being conscientious, emotionally stable, and active (a facet of extraversion).

Low levels of neuroticism and high levels of extraversion are also associated with a lower later-life risk of developing dementia, according to recent research in Neurology (reported in the Leitrim Observer).

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).

Psychological Traits and the Gender Gap in Wages

Nils Braakmann from Leuphana University, Lüneburg has used the German Socio-Economic Panel to show that differences in various non-cognitive traits, specifically the “Big Five”, positive and negative reciprocity, locus of control and risk aversion, contribute to gender inequalities in wages and employment. The evidence suggests that gender differences in psychological traits are more important for inequalities in wages than in employment. Differences in the “Big Five”, in particular in agreeableness, conscientiousness and neurocitism matter for both wages and employment. The paper is available here.

Do Cognitive Skills Depend on Non-Cognitive Skills? And If So, What Does the Labour Market Reward?

In a previous post, I mentioned research on behavioural determinents of earnings by Bowles et al. (2001); these authors report that cognitive skills represent less than a fifth of the return to schooling. They suggest that the remaining 82% of the return to schooling could either be associated with more advanced cognitive skills that are not captured by basic measures, or with noncognitive skills. More recently, Pasche (2008) finds that over half the return to schooling is constituted of basic cognitive skills. Either way, the bias of non-cognitive personality traits is important when estimating the returns to education.

Research by Borghans, Meijers and ter Weel (reported at the AEA meeting earlier this month), examines the role of noncognitive skills in explaining cognitive test scores. They measure noncognitive skills both by personality traits and economic preference parameters; and the idea is that noncognitive skills might affect the effort people put into a test to obtain good results.

The authors experimentally varied the rewards for questions in a cognitive test to measure to what extent people are sensitive to financial incentives. To distinguish increased mental effort from extra time investments, they also varied the questions’ time constraints. Favourable personality traits such as high performance-motivation and an internal locus of control are associated with high test scores in the absence of rewards; which the authors say is consistent wiith trying as hard as possible.

In contrast, favourable economic preference parameters (low discount rate, low risk aversion) are associated with increases in time investments when incentives are introduced, consistent with a rational economic model in which people only invest when there are monetary returns.

The main conclusion of the research is that individual behavior in cognitive tests depends on noncognitive skills. This means that de-compositions of the returns to schooling may be biased towards cognitive skills in ways that have not been considered before. This underscores further the need to consider the bias of non-cognitive personality traits when estimating the returns to education.

Extraversion and Expectations about the Returns to Higher Education

Gergely and Kézdi discuss college enrollment, the Big Five personality traits (in particular extraversion), and earnings expectations in the context of Hungarian higher education. They report that conditional on IQ and various measures of other personality traits, as well as past schooling experience and past behavioral problems, more extraverted men expect lower returns to higher education.

What Do We Know About Genes, Personality and Behaviour?

Deric Bownd's MindBlog is a useful resource to answer a question such as this. Here Bownds discusses the genetics of personality and well-being. He mentions a study by Weiss et al. (Psychological Science, 2008) that examines personality and subjective well-being in 973 twin pairs. Bownds mentions that numerous studies of personality have shown that genetic effects account for approximately 50% of the variance in the 'Big Five' peronslity traits. Weiss et al. report a very close genetic relationship between positive personality traits and well-being.

Bownds also mentions on his blog (here) that the Nov. 7 issue of Science Magazine is a gold mine of articles on genetics and behavior. He mentions that some believe that psychology is the last frontier of genetic analysis. Of particular interest, there is a story on the strengths and shortcomings of genetic studies of personality. Also, Bownds discusses on his blog (here) a gene that is associated with risk-taking.

The Returns to Positive Social Development in Childhood

Mary Silles from NUI Galway produced a working paper at Copenhagen's Center for Applied Microeconometrics in 2005, entitled "Personality, Education and Earnings". The paper uses the UK National Child Development Study to examine the effects of social maladjustment in childhood on schooling and earnings. "Net of differences in family background and cognitive ability, estimates suggest that early social maladjustment scores are associated with lower labor market earnings and schooling. These results suggest that there are substantial returns to fostering positive social development in childhood."

What Do We Know About Non-Cognitive Personality, Education and Earnings?

Bowles et al. (2001) find that, on average, controlling for cognitive skills reduces the years of schooling coefficient by 18%. Cognitive skills therefore represent less than a fifth of the return to schooling. The remaining 82% of the return to schooling could either be associated with more advanced cognitive skills that are not captured by basic measures, or with noncognitive skills. A different finding was recently presented by Pasche (2008) - 'What is it About Schooling That the Labor Market Rewards? The Components of the Return to Schooling'. Pasche finds that over half the return to schooling is constituted of basic cognitive skills. Either way, the bias of non-cognitive personality traits is important when estimating the returns to education.

According to Linz and Semykina (2005), personality may affect earnings through gender; they find that women's earnings are affected by personality, while men's earnings are not; the "unexplained" portion of the gender wage gap falls by as much as 12% when personality traits are included. Mueller and Plug (2004) also find that gender is important - they show that antagonistic, emotionally stable and open men enjoy substantial earnings advantages over otherwise similar individuals; whereas the labour market appears to value conscientiousness and openness to experience for women. Heineck and Anger (2008) produce evidence for a robust wage penalty associated with an external locus of control, for both men and women.

Heineck (2009 - from the recent AEA meeting) finds evidence for a negative relationship between wages and agreeableness for men, a negative relationship between wages and neuroticism for females, and a positive relationship between openness to experience and wages for women. Borghans et al. (2008 - from the recent AEA meeting) suggests that people are most productive in jobs that match their style. An oversupply of one attribute relative to the other reduces wages for people who are better with the attribute in greater supply. According to Lee (2006), issues that require further study and resolution are 1) which traits create wage differentials, and 2) two-way causality: does personality affect the wage, or does a wage premium become an incentive for a person to adopt new memes?

How extraverted is honey.bunny77@hotmail.de?

A recent article in Technimentis explains what our email addresses may reveal about our personalities. (I had problems opening this webpage with Explorer so you may want to use a different browser). The story is based on findings by Back, Schmukle and Egloff (2008): "How extraverted is honey.bunny77@hotmail.de? Inferring personality from e-mail addresses", Journal of Research in Personality, 42 (4), 1116-1122.

Six hundred participants provided their e-mail address and were assessed with a short form of the Big Five Inventory, and the Narcissistic Personality Inventory. Another batch of participants ("observers") rated all of the first groups’ e-mail addresses on 11 personality ratings. The researchers discovered three main results:

1. Observers agreed on their ratings of the e-mail address owners’ personalities.
2. Observers’ ratings were accurate on all personality dimensions except extraversion.
3. E-mail addresses influenced observers, provided valid personality cues, and were utilized fully to make judgments.

The conclusion offered is that individuals could accurately judge the openness level of an individual solely on e-mail address alone; conscientiousness and narcissism are somewhat more difficult to track, and agreeableness and neuroticism slightly more challenging again.