Preferences, Ability, and Personality : Understanding Decision-making Under Risk and Delay.

Summary Preferences, abilities, and personality predict a wide range of economic outcomes. I map them into a structural decision-making framework using unique experimental data collected on more than 1200 individuals each making more than 100 financially relevant decisions.I jointly estimate the distributions of risk and time preferences in the population, their stability at the individual level, and the tendency of people to make mistakes. I use the Randomized Preference Model (RPM), which has recently been shown to have superior theoretical properties to previously employed models. I show that the RPM has strong internal validity. The five estimated structural parameters dominate a wide range of demographic and socioeconomic variables when explaining observed individual choices. I demonstrate the economic and econometric importance of using preference shocks and incorporating the so-called "shaky hand" parameter. Errors and instability in preferences are related to different capabilities. I propose a rationality index that condenses them into a single predictor of welfare losses.I use a factor model to extract cognitive ability and "Big Five" personality traits from many measures. They explain up to 50% of the variation in people's preferences and ability to make rational choices. Conscientiousness alone explains 45% and 10% of the cross-sectional variation in discount rate and risk aversion, and 20% of the variation in their individual stability. In addition, risk aversion is related to extraversion and errors depend on cognitive ability, effort, and task parameters. Preferences are stable for the median individual. Nevertheless, a portion of the population has some instability in preferences that is indicative of imperfect self-knowledge.These results have implications both for the specification of reduced-form and structural economic models, and also for the explanation of inequality and the intergenerational transmission of socioeconomic status.