Essays on the Endogeneity of Preferences and Personality Traits

Abstract

Economic preferences and personality traits are fundamental explanatory factors in understanding individual decision-making. They explain the heterogeneity within human behavior and are the reason why individuals differ in their actions although the preliminaries are the same. Labor market behavior, educational choices, investment decisions as well as fertility and health outcomes are only a few examples in which inherent characteristics play a key role. These findings rely on one joint assumption: preferences and personality traits do not change across the working age. The point in time when preferences are defined and measured is thus irrelevant. However, if this assumption is violated, theoretical models and empirical studies face the threat of endogeneity biases: preferences do not only affect life's outcomes, life's outcomes may also affect preferences. Testing the exogeneity assumption is thus obligatory. Herein, the present thesis makes its contribution and presents three different studies on the stability of economic preferences and personality traits. The first study in this thesis focuses on the stability of time preferences. So far, evidence on their stability is scarce and considerably restricted by very short time frames, very small sample sizes, or both. The Dutch Household Survey enables these obstacles to be circumvented and the long-term stability of time preferences within a representative sample to be analyzed. By relying on the `consideration of future consequences’ scale -- a behaviorally validated survey measure on time preferences -- this thesis finds that time preferences have, compared to other economic attitudes, a relatively low intra-individual stability. However, the analysis reveals that individuals' valuation of future utility neither varies with age nor changes persistently with past life experiences. Similar findings result from a replication of the analysis with the German Socio-Economic Panel and its ultra-short survey items on patience and impulsiveness. The thesis, therefore, comes to the conclusion that time preferences are stable in the long run but subjected to measurement issues. The second study focuses on the determinants of risk-taking. Using German panel data, we find that people become more risk-averse when losing work. The immediate income loss does not mediate this effect. Risk aversion also seems unrelated to the loss of non-monetary benefits of work. However, the study finds that risk aversion responds more strongly to losing work the more future income is at stake, and the effect manifests itself on the eve of job loss even when people have not yet suffered from the consequences of the event. Lower future income expectations and more uncertainty about future incomes may thus explain the effect of job loss on risk attitude. Nevertheless, the effect is not persistent. After some time, individuals turn back to their initial level of risk attitude. The last chapter of this thesis tests the stability of locus of control, a measure that depicts how much people believe in their ability to affect life outcomes. Using the German Socio-Economic Panel, we find that a job loss due to a plant closure has no long-lasting effect on locus of control. The common assumption of its stability is thus not rejected. However, during unemployment, control perception decreases significantly. The effect holds true independent from unemployment duration or socio-demographic characteristics and vanishes as soon as the unemployed find a new job. In conclusion, measurement of locus of control is affected by unemployment but not the trait itself. Using this trait as the explanatory variable can thus lead to biased estimations if this temporary deviation in measurement is not accounted for. In conclusion, the present thesis neither rejects the stability assumption nor claims that preferences or personality are perfectly stable. All measures analyzed change with time. But, interpreting this instability as proof of endogenous preferences or personality traits appears unjustified. Each of the studies proposes alternative, less controversial interpretations of instability.