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

102 Pages Posted: 3 Feb 2017

See all articles by Victor Stango

Victor Stango

UC Davis Graduate School of Management

Joanne Yoong

National University of Singapore (NUS)

Jonathan Zinman

Dartmouth College; Innovations for Poverty Action; Jameel Poverty Action Lab; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 30, 2017

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 lower-dimensional, 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 within-individual 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, inter-relationships, 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.

Keywords: Behavioral economics, behavioral finance, household finance, psychology and economics, behavioral macroeconomics, behavioral public finance.

JEL Classification: D03, D1, D14, D91, E03, E21, G02

Suggested Citation

Stango, Victor and Yoong, Joanne and Zinman, Jonathan, The Quest for Parsimony in Behavioral Economics: New Methods and Evidence on Three Fronts (January 30, 2017). Available at SSRN: https://ssrn.com/abstract=2910574 or http://dx.doi.org/10.2139/ssrn.2910574

Victor Stango (Contact Author)

UC Davis Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States

Joanne Yoong

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Jonathan Zinman

Dartmouth College ( email )

Hanover, NH 03755
United States
603-646-0075 (Phone)

HOME PAGE: http://https://sites.dartmouth.edu/jzinman/

Innovations for Poverty Action

1731 Connecticut Ave, 4th floor
New Haven, CT 20009
United States

Jameel Poverty Action Lab

E60-246
77 Massachusetts Avenue
Cambridge, MA 02139
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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