The Quest for Parsimony in Behavioral Economics: New Methods and Evidence on Three Fronts

Abstract

Behavioral economics identifies myriad deviations from classical economic assumptions about consumer decision-making, but lacks evidence on how its diverse phenomena fit together and whether they are amenable to modeling as low-dimensional constructs. We pursue such parsimony on three fronts, with success on two and instructive failure on the third. Elicitation parsimony reduces impediments to data collection by streamlining standard methods for directly measuring a person's behavioral tendencies. We do so for 17 potentially behavioral factors per individual in a large, nationally representative sample, and several sets of results indicate that our streamlined elicitations yield low-cost, high-quality data. Behavioral sufficient statistic parsimony aggregates information across behavioral factors, within-person, to create two new lowerdimensional, consumer-level measures of behavioral tendencies. These statistics usefully capture cross-sectional variation in behavioral tendencies, strongly and negatively correlating with a rich index of financial condition even after (over-)controlling for demographics, classical risk attitudes and patience, cognitive skills including financial literacy, and survey effort. Our quest for common factor parsimony largely fails: within-consumer correlations between behavioral factors tend to be low, and the common factor contributing to all 17 behavioral factors withinindividual is weakly identified and does not help explain outcomes conditional on the other covariates. Altogether our results provide many new insights into behavioral factors: their distributions, interrelationships , distinctions from classical factors, and links to outcomes. Our findings also support the two leading approaches to modeling behavioral factors-considering them in relative isolation, and summarizing them with reduced-form sufficient statistics-and provide data and methods for honing both approaches.

The Impact of Salience on Investor Behavior: Evidence from a Natural Experiment

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“…(4) CEOs may not be identified in the psychology literature. Overconfident individuals have been found to have weaker networks (Burt 1997;Klayman et al 1999;Hayward et al 2006;Gudmundsson and Lechner 2013), to be too optimistic with organization, planning, and commitments (Larwood and Whittaker 1977;Vallone et al 1990), to have lower analytical skills and cognitive ability (Stango et al 2017;Chapman et al 2018), and to be worse listeners and feedback seekers (Tost et al 2012;Meikle et al 2016). Given that Longholder CEOs exhibit similar characteristics, our evidence is consistent with the interpretation of Longholder as measuring overconfidence.…”

Errors in probabilistic reasoning and judgment biases

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