Paper detail

Heat and Economic Preferences

The empirical evidence suggests that key accumulation decisions and risky choices associated with economic development depend, at least in part, on economic preferences such as willingness to take risk and patience. This paper studies whether temperature could be one of the potential channels that influences such economic preferences. Using data from the Indonesia Family Life Survey and NASAs Modern Era Retrospective Analysis for Research and Applications data we exploit quasi exogenous variations in outdoor temperatures caused by the random allocation of survey dates. This approach allows us to estimate the effects of temperature on elicited measures of risk aversion, rational choice violations, and impatience. We then explore three possible mechanisms behind this relationship, cognition, sleep, and mood. Our findings show that higher temperatures lead to significantly increased rational choice violations and impatience, but do not significantly increase risk aversion. These effects are mainly driven by night time temperatures on the day prior to the survey and less so by temperatures on the day of the survey. This impact is quasi linear and increasing when midnight outdoor temperatures are above 22C. The evidence shows that night time temperatures significantly deplete cognitive functioning, mathematical skills in particular. Based on these findings we posit that heat induced night time disturbances cause stress on critical parts of the brain, which then manifest in significantly lower cognitive functions that are critical for individuals to perform economically rational decision making.