The Economics and Psychology of Personality Traits

IZA DP No. 3333
APER SERIES
The Economics and Psychology of Personality Traits
Lex Borghans
Angela Lee Duckworth
James J. Heckman
Bas ter Weel
DISCUSSION P
February 2008
Forschungsinstitut
zur Zukunft der Arbeit
Institute for the Study
of Labor

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The Economics and Psychology of
Personality Traits


Lex Borghans
ROA, Maastricht University and IZA

Angela Lee Duckworth
University of Pennsylvania

James J. Heckman
University of Chicago, American Bar Foundation,
University College Dublin and IZA

Bas ter Weel
CPB Netherlands Bureau for Economic Policy Analysis,
UNU-MERIT, Maastricht University and IZA


Discussion Paper No. 3333
February 2008



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IZA Discussion Paper No. 3333
February 2008








ABSTRACT

The Economics and Psychology of Personality Traits*

This paper explores the interface between personality psychology and economics. We
examine the predictive power of personality and the stability of personality traits over the life
cycle. We develop simple analytical frameworks for interpreting the evidence in personality
psychology and suggest promising avenues for future research.


JEL Classification:
I2, J24

Keywords:
personality traits, lifecycle effects


Corresponding author:

Lex Borghans
Department of Economics and ROA
Maastricht University
P.O. Box 616
6200 MD Maastricht
The Netherlands
E-mail: lex.borghans@algec.unimaas.nl



* Duckworth’s work is supported by a grant from the John Templeton Foundation. Heckman’s work is
supported by NIH R01-HD043411, and grants from the American Bar Foundation, The Pew Charitable
Trusts, and the Partnership for America's Economic Success, and the J.B. Pritzker Consortium on
Early Childhood Development. Ter Weel’s work was supported by a research grant of the Netherlands
Organisation for Scientific Research (grant 014-43-711). Chris Hsee gave us very useful advice at an
early stage. We are grateful to Arianna Zanolini for helpful comments and research assistance. We
have received very helpful comments on various versions of this draft from Gary Becker, Dan
Benjamin, Dan Black, Ken Bollen, Sam Bowles, Frances Campbell, Flavio Cunha, John Dagsvik,
Michael Daly, Kevin Denny, Liam Delany, Thomas Dohmen, Greg Duncan, Armin Falk, James Flynn,
Linda Gottfredson, Lars Hansen, Joop Hartog, Moshe Hoffman, Bob Hogan, Nathan Kuncel, John List,
Lena Malofeeva, Kenneth McKenzie, Kevin Murphy, Frank Norman, David Olds, Friedhelm Pfeiffer,
Bernard Van Praag, Elizabeth Pungello, Howard Rachlin, C. Cybele Raver, Bill Revelle, Brent Roberts,
Carol Ryff, Larry Schweinhart, Jesse Shapiro, Rebecca Shiner, Burt Singer, Richard Suzman, Harald
Uhlig, Sergio Urzua, Gert Wagner, Herb Walberg, and participants in workshops at the University of
Chicago (Applications Workshop), Iowa State University, Brown University, University College Dublin,
and Washington State University. The views expressed in this paper are those of the authors and not
necessarily of the funders or commenters listed here. Supplemental tables are available online at:
http://jenni.uchicago.edu/econ-psych-traits/

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I.
Introduction
There is ample evidence from economics and psychology that cognitive ability is a
powerful predictor of economic and social outcomes.1 It is intuitively obvious that cognition is
essential in processing information, learning, and in decision making.2 It is also intuitively
obvious that other traits besides raw problem-solving ability matter for success in life. The
effects of personality traits, motivation, health, strength, and beauty on socioeconomic outcomes
have recently been studied by economists.3

The power of traits other than cognitive ability for success in life is vividly
demonstrated by the Perry Preschool study. This experimental intervention enriched the early
family environments of disadvantaged children with subnormal intelligence quotients (IQs).
Both treatments and controls were followed into their 40s. As demonstrated in Figure 1, by age
ten, treatment group mean IQs were the same as control group mean IQs. Yet on a variety of
measures of socioeconomic achievement, over their life cycles, the treatment group was far more
successful than the control group.4 Something besides IQ was changed by the intervention.
Heckman et al. (2007) show that it is the personality and motivation of the participants. This
paper examines the relevance of personality to economics and the relevance of economics to
personality psychology.
Both economists and psychologists estimate preference parameters such as time
preference, risk aversion, altruism, and, more recently, social preferences, to explain the
behaviors of individuals. The predictive power of these preference parameters, their origins and
the stability of these parameters over the lifecycle, are less well understood and are actively
being studied.

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Economists are now beginning to use the personality inventories developed by
psychologists. This paper examines these measurement systems and their relationship with the
preference parameters of economists. There is danger in economists taking the labels assigned to
psychologists’ personality scores literally and misinterpreting what they actually measure. We
examine the concepts captured by the psychological measurements and the stability of the
measurements across situations in which they are measured.
We eschew the term “noncognitive” to describe personality traits even though many
recent papers in economics use this term in this way. In popular usage, and in our own prior
work, “noncognitive” is often juxtaposed with “cognitive”. This contrast has intuitive appeal
because of contrast between cognitive ability and traits other than cognitive ability. However, a
contrast between “cognitive” and “noncognitive” traits creates the potential for much confusion
because few aspects of human behavior are devoid of cognition. Many aspects of personality are
influenced by cognitive processes. We show that measurements of cognitive ability are affected
by personality factors.
We focus our analysis on personality traits, defined as patterns of thought, feelings, and
behavior. We do not discuss in depth motivation, values, interests, and attitudes which give rise
to personality traits. Thus, we focus our discussion on individual differences in how people
actually think, feel, and act, not on how people want to think, feel, and act. This omission bounds
the scope of our work and focuses attention on traits that have been measured. We refer the
interested reader to McAdams (2006), Roberts et al. (2006), and McAdams and Pals (2007) for
an overview of the literature in psychology on aspects of personality that we neglect.5,6
Our focus is pragmatic. Personality psychologists have developed measurement systems
for personality traits which economists have begun to use. Most prominent is the “Big Five”

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personality inventory. There is value in understanding this system and related systems before
tackling the deeper question of the origins of the traits that are measured by them.
The lack of familiarity of economists with these personality measures is one reason for
their omission from most economic studies. Another reason is that many economists have yet to
be convinced of their predictive validity, stability or their causal status, believing instead that
behavior is entirely situationally determined. Most data on personality are observational and not
experimental. Personality traits may, therefore, reflect, rather than cause, the outcomes that they
are alleged to predict. Large-scale studies are necessarily limited in the array of personality
measures that they include. Without evidence that there is value in knowing which personality
traits are most important in predicting outcomes, there is little incentive to include sufficiently
broad and nuanced personality measures in empirical studies.
Most economists are unaware of the evidence that certain personality traits are more
malleable than cognitive ability over the life cycle and are more sensitive to investment by
parents and to other sources of environmental influences at later ages than are cognitive traits.
Social policy designed to remediate deficits in achievement can be effective by operating outside
of purely cognitive channels.
This paper shows that it is possible to conceptualize and measure personality traits and
that both cognitive ability and personality traits predict a variety of social and economic
outcomes. We study the degree to which traits are stable over situations and over the life cycle.
We examine the claim that behavior is purely situation-specific and show evidence against it.
Specifically, in this paper we address the following questions.
1. Is It Conceptually Possible to Separate Cognitive Ability from Personality Traits?

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Many aspects of personality are a consequence of cognition, and cognition depends on
personality. Nonetheless, one can separate those two aspects of human differences.
2. Is It Possible to Empirically Distinguish Cognitive from Personality Traits?
Measures of economic preferences are influenced by numeracy and intelligence. IQ test
scores are determined not only by intelligence, but also by factors such as motivation and
anxiety. Moreover, over the life cycle, the development of cognitive ability is influenced by
personality traits such as curiosity, ambition, and perseverance.
3. What Are the Main Measurement Systems in Psychology for Intelligence and
Personality, and How Are They Validated?
Most personality psychologists rely on paper-and-pencil self report questionnaires. Other
psychologists and many economists measure conventional economic preference parameters, such
as time preference and risk aversion. We summarize both types of studies. There is a gap in the
literature in psychology: it does not systematically relate the two types of measurement systems.
Psychologists seeking to create valid personality questionnaires balance multiple
concerns. One objective is to create questionnaires with construct-related validity defined as
constructs with an internal factor structure that is consistent across time, gender, ethnicity, and
culture. A distinct concern is creation of survey instruments with predictive validity. With
notable exceptions, contemporary personality psychologists seeking direct measures of
personality traits privilege construct validity over predictive validity in their choice of measures.
4. What is the Evidence on the Predictive Power of Cognitive and Personality Traits?
We summarize evidence that both cognitive ability and personality traits predict
important outcomes, including schooling, wages, crime, teenage pregnancy, and longevity. For
many outcomes, certain personality traits (that is, traits associated with Big Five

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Conscientiousness and Emotional Stability) are more predictive than others (that is, traits
associated with Agreeableness, Openness to Experience, and Extraversion). Tasks in social and
economic life vary in terms of the weight placed on the cognitive and personality traits required
to predict outcomes. The relative importance of a trait varies by the task studied. Cognitive
traits are predictive of performance in a greater variety of tasks. Personality traits are important
in explaining performance in specific tasks, although different personality traits are predictive in
different tasks. The classical model of factor analysis, joined with the principle of comparative
advantage, helps to organize the evidence in economics and psychology.
5. How Stable Are Personality Traits Across Situations and Across The Life Cycle? Are
They More Sensitive than Cognitive Traits to Investment and Intervention?7
We present evidence that both cognitive and personality traits evolve over the lifecycle—
but to different degrees and at different stages of the life cycle. Cognitive processing speed, for
example, tends to rise sharply during childhood, peak in late adolescence, and then slowly
decline. In contrast, some personality traits, such as conscientiousness, increase monotonically
from childhood to late adulthood. Rank-order stability for many personality measures peaks
between the ages of 50 to 70, whereas IQ reaches these same levels of stability by middle
childhood. We also examine the recent evidence on the situational specificity of personality
traits. Traits are sufficiently stable across situations to support the claim that traits exist,
although their manifestation depends on context and the traits themselves evolve over the life
cycle. Recent models of parental and environmental investment in children explain the evolution
of these traits. We develop models in which traits are allocated differentially across tasks and
activities. Persons may manifest different levels of traits in different tasks and activities.

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6. Do the Findings from Psychology Suggest That Conventional Economic Theory Should
Be Enriched? Can Conventional Models of Preferences in Economics Explain the Body of
Evidence from Personality Psychology? Does Personality Psychology Merely Recast Well-
Known Preference Parameters into Psychological Jargon, or is There Something New for
Economists to Learn?
Conventional economic theory is sufficiently elastic to accommodate many findings of
psychology. However, our analysis suggests that certain traditional concepts used in economics
should be modified and certain emphases redirected. Some findings from psychology cannot be
rationalized by standard economic models and could fruitfully be incorporated into economic
analysis. Much work remains to be done in synthesizing a body of empirical knowledge in
personality psychology into economics.
The evidence from personality psychology suggests a more radical reformulation of
classical choice theory than is currently envisioned in behavioral economics which tinkers with
conventional specifications of preferences. Cognitive ability and personality traits impose
constraints on agent choice behavior. More fundamentally, conventional economic preference
parameters can be interpreted as consequences of these constraints. For example, high rates of
measured time preference may be produced by the inability of agents to delay gratification,
interpreted as a constraint, or by the inability of agents to imagine the future. We develop a
framework that introduces psychological variables as constraints into conventional economic
choice models.
The paper proceeds in the following way. Section II defines cognitive ability and
personality traits and describes how these concepts are measured. Section III considers
methodological issues that arise in interpreting the measurements. Section IV presents evidence

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by psychologists and economists on basic economic parameters. Section V examines the
predictive power of the traits studied by personality psychologists who, in general, are a distinct
body of scholars from the psychologists measuring economics preference parameters. Section
VI examines the evidence on the evolution of preference parameters and personality traits over
the life cycle. We summarize recent work in psychology that demonstrates stability in
preference parameters across diverse settings. Section VII presents a framework for interpreting
personality and economic parameters. Recent work in behavioral economics and psychology
that seeks to integrate economics and psychology focuses almost exclusively on preference
parameters. In contrast, we present a broader framework that includes constraints, skill
acquisition, learning as well as conventional preference parameters. Section VIII concludes by
summarizing the paper and suggesting an agenda for future research.
II.
Definitions And A Basic Framework Of Measurement And Interpretation
We distinguish between cognitive ability on the one hand and personality traits on the
other. We do not mean to imply that personality traits are devoid of any elements of cognitive
processing, or vice versa. Schulkin (2007) reviews evidence that cortical structures associated
with cognition and higher level functions play an active role in regulating motivation, a function
previously thought to be the exclusive domain of sub-cortical structures8. Conversely, Phelps
(2006) shows that emotions associated with personality traits are involved in learning, attention,
and other aspects of cognition. A distinction between cognitive ability and personality traits
begs for a specific definition of cognitive ability. Before defining these concepts, we first review
the rudiments of factor analysis, which is the conceptual framework that underlies much of the
literature in psychology, and is a basis for unifying economics with that field. We use the factor

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