Is There a Development Gap in Rationality?

39 Pages Posted: 7 May 2014

See all articles by Alexander W. Cappelen

Alexander W. Cappelen

Norwegian School of Economics (NHH) - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Shachar Kariv

University of California, Berkeley - Department of Economics

Erik Sorensen

Norwegian School of Economics (NHH) - Department of Economics

Bertil Tungodden

Norwegian School of Economics (NHH) - Department of Economics

Date Written: January 28, 2014

Abstract

We report an experimental test of the four touchstones of rationality in choice under risk – utility maximization, stochastic dominance, expected-utility maximization and small-stakes risk neutrality – with students from one of the best universities in the United States and one of the best universities in Africa, the University of Dar es Salaam. Although the US and the Tanzanian subjects come from different backgrounds and face different economic prospects, they are united by being among the most able in their societies. Importantly, many of whom will exercise an outsized influence over economic and political affairs. We find very small or no significant differences between the two samples in the degree of rationality according to a number of standard economic measures. An alternative approach is to take cognitive ability (IQ) as a proxy for economic rationality. We show that a canonical IQ test indicates a much larger development gap in rationality relative to our economic tests.

Keywords: development, rationality, revealed preference, stochastic dominance, expected utility, risk aversion, cognitive ability, experiment

JEL Classification: D01, D03, D81, F61, F63, O12

Suggested Citation

Cappelen, Alexander W. and Kariv, Shachar and Sorensen, Erik and Tungodden, Bertil, Is There a Development Gap in Rationality? (January 28, 2014). NHH Dept. of Economics Discussion Paper No. 08/2014, Available at SSRN: https://ssrn.com/abstract=2432909 or http://dx.doi.org/10.2139/ssrn.2432909

Alexander W. Cappelen

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Shachar Kariv

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

Erik Sorensen

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
Bergen, NO-5045
Norway

Bertil Tungodden (Contact Author)

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

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