Wednesday, September 11, 2019

The effect of stress on economic rationality: Rationality is not impaired by the stressor; if anything, participants are more consistent with rationality immediately after the stressor

Cortisol meets GARP: the effect of stress on economic rationality. E. Cettolin et al. Experimental Economics, September 11 2019.

Abstract: Rationality is a fundamental pillar of Economics. It is however unclear if this assumption holds when decisions are made under stress. To answer this question, we design two laboratory experiments where we exogenously induce physiological stress in participants and test the consistency of their choices with economic rationality. In both experiments we induce stress with the Cold Pressor test and measure economic rationality by the consistency of participants’ choices with the Generalized Axiom of Revealed Preference (GARP). In the first experiment, participants delay the decision-making task for 20 min until the cortisol level peaks. We find significant differences in cortisol levels between the stressed group and the placebo group which, however, do not affect the consistency of choices with GARP. In a second experiment, we study the immediate effect of the stressor on rationality. Overall, results from the second experiment confirm that rationality is not impaired by the stressor. If anything, we observe that compared to the placebo group, participants are more consistent with rationality immediately after the stressor. Our findings provide strong empirical support for the robustness of the economic rationality assumption under physiological stress.

Keywords: Economic rationality GARP Physiological stress Cortisol

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