The role of education interventions in improving economic rationality

Abstract

Schooling rewards people with labor market returns and nonpecuniary benefits in other realms of life. However, there is no experimental evidence showing that education interventions improve individual economic rationality. We examine this hypothesis by studying a randomized 1-year financial support program for education in Malawi that reduced absence and dropout rates and increased scores on a qualification exam of female secondary school students. We measure economic rationality 4 years after the intervention by using lab-in-the-field experiments to create scores of consistency with utility maximization that are derived from revealed preference theory. We find that students assigned to the intervention had higher scores of rationality. The results remain robust after controlling for changes in cognitive and noncognitive skills. Our results suggest that education enhances the quality of economic decision-making. R ationality in human choices has been a cornerstone assumption in traditional economic analysis and yet one of the most controversial issues in social and behavioral sciences (1). Mounting evidence shows that people tend to make systematic errors in judgment and decision-making and that there is a high level of heterogeneity in the extent to which rationality is limited across decisions and individuals (2, 3). The welfare loss resulting from poor decisions can be substantial, which implies that policy-makers might want to rethink the role of public policy in response to the failure of rationality (4).The behavioral science literature has accumulated evidence on ways of improving people's capabilities and quality of decision-making: changing incentives, restructuring choice architecture, and debiasing training (5-7). Most of these approaches target the reduction of decision biases in particular contexts of economic activities but do not address the improvement of general capabilities of decision-making that are transferrable across decision domains. It is often controversial to judge whether decision biases are driven by the failure of rationality or other factors such as anomalous preferences.Schooling has been shown to influence a wide range of outcomes, including income, health, and crime (8,9). One little-explored hypothesis is that education improves people's decision-making abilities and leads them to make better decisions across various choice environments. The impacts of education on decision-making can then be a potential mechanism underlying the pecuniary and nonpecuniary returns to education.We examine this hypothesis by studying a nongovernmental organization-implemented randomized controlled trial of education support in Malawi, an environment where, among young females, only 21.4% have received some secondary education and 9.8% have completed secondary school education (10). The program randomly provided financial support for education in a sample of 2812 female 9th and 10th graders from 83 classrooms in 33 public schools between the third semester of the academic year 2011-2012 and the seco...

Keeping a cool head at all times. What determines choice consistency?

“…However, a causal effect of education seems to be especially pronounced in younger children, as the educational intervention in Kim et al (2018) did affect choice consistency of ninth graders but not tenth graders and Banks, Carvalho & Perez-Arce (2018) did not find an effect of an educational reform increasing the minimum allowed age to leave school from 15 to 16. Since both studies used a large sample, their null (sub-)findings are unlikely due to a lack of statistical power.…”

“…By definition, inconsistent choice leads to loss of wealth (money pump phenomenon; see above). On the other hand, a surge of income can increase access to education and, thus, indirectly increase choice consistency (Kim et al, 2018). Hence, while choice consistency and income seem to be closely intertwined, causal inference of a direct influence of income on choice consistency is beyond what is allowed for by the data at this point.…”

“…They found that a high level of education was a significant predictor for scoring a higher critical cost efficiency index. Kim et al (2018) investigated the effect of education in a randomized-controlled design, by randomly granting a 1-year financial support program for education among 2812 female Malawi students. The program reduced absence and drop-out rates and increased scores in a qualification exam.…”

“…Choice consistency has been tested in various domains, such as food choice (Bruyneel et al, 2012;Burghart et al, 2013;Camille et al, 2011;Harbaugh et al, 2001;Lazzaro et al, 2016), decisions under risk (Castillo et al, 2017;Choi et al, 2007Choi et al, , 2014Drichoutis & Nayga, 2017;Kim et al, 2018), intertemporal choice (Andreoni & Sprenger, 2012;Chakraborty et al, 2017;Kim et al, 2018), altruistic decisions (Andreoni & Miller, 2002) and moral intuitions (Barbato et al, 2017). However, direct cross-domain comparisons have not been attempted to date.…”

“…There are several sophisticated goodness of fit measures that quantify the degree to which choice behavior is consistent (Dean & Martin, 2016;Echenique et al, 2011;Heufer & Hjertstrand, 2015;Varian, 1993). The most prominent of these measures is Afriat's criticial cost efficiency index (Afriat, 1972(Afriat, , 1973Varian, 1993), which has been used in many studies on choice consistency as defined by revealed preference theory (Andreoni & Miller, 2002;Banks et al, 2018;Bruyneel et al, 2012;Burghart et al, 2013;Cappelen et al, 2014;Castillo et al, 2017;Choi et al, 2007Choi et al, , 2014Drichoutis & Nayga, 2017;Harbaugh et al, 2001;Kim et al, 2018;Lazzaro et al, 2016).…”