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Risk Aversion Relates to Cognitive Ability: Fact or Fiction?

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  • Andersson, Ola

    (Research Institute of Industrial Economics (IFN))

  • Tyran, Jean-Robert

    (Department of Economics, University of Vienna)

  • Wengström, Erik

    (Department of Economics, Lund University)

  • Holm, Håkan J.

    (Department of Economics, Lund University)

Abstract

Recent experimental studies suggest that risk aversion is negatively related to cognitive ability. In this paper we report evidence that this relation might be spurious. We recruit a large subject pool drawn from the general Danish population for our experiment. By presenting subjects with choice tasks that vary the bias induced by random choices, we are able to generate both negative and positive correlations between risk aversion and cognitive ability. Structural estimation allowing for heterogeneity of noise yields no significant relation between risk aversion and cognitive ability. Our results suggest that cognitive ability is related to random decision making rather than to risk preferences.

Suggested Citation

  • Andersson, Ola & Tyran, Jean-Robert & Wengström, Erik & Holm, Håkan J., 2013. "Risk Aversion Relates to Cognitive Ability: Fact or Fiction?," Working Papers 2013:9, Lund University, Department of Economics, revised 21 Oct 2013.
    • Handle: RePEc:hhs:lunewp:2013_009
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    Cited by:

    1. Filippin, Antonio & Crosetto, Paolo, 2014. "A Reconsideration of Gender Differences in Risk Attitudes," IZA Discussion Papers 8184, Institute of Labor Economics (IZA).
    2. repec:cup:judgdm:v:8:y:2013:i:3:p:268-277 is not listed on IDEAS
    3. Öhman, Mattias, 2015. "Be smart, live long: the relationship between cognitive and non-cognitive abilities and mortality," Working Paper Series 2015:21, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    4. Cueva, Carlos & Iturbe-Ormaetxe, Iñigo & Mata-Pérez, Esther & Ponti, Giovanni & Sartarelli, Marcello & Yu, Haihan & Zhukova, Vita, 2016. "Cognitive (ir)reflection: New experimental evidence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 64(C), pages 81-93.
    5. Kiss, H.J. & Rodriguez-Lara, I. & Rosa-García, A., 2016. "Think twice before running! Bank runs and cognitive abilities," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 64(C), pages 12-19.
    6. Jan-Erik Loennqvist & Markku Verkasalo & Gari Walkowitz & Philipp C. Wichardt, 2011. "Measuring Individual Risk Attitudes in the Lab: Task or Ask? An Empirical Comparison," Cologne Graduate School Working Paper Series 02-03, Cologne Graduate School in Management, Economics and Social Sciences.
    7. Brañas-Garza, Pablo & Kujal, Praveen & Lenkei, Balint, 2019. "Cognitive reflection test: Whom, how, when," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 82(C).
    8. Andersson, Ola & Holm, Håkan J. & Tyran, Jean-Robert & Wengström, Erik, 2013. "Risking Other People’s Money: Experimental Evidence on Bonus Schemes, Competition, and Altruism," Working Paper Series 989, Research Institute of Industrial Economics.
    9. Menkhoff, Lukas & Sakha, Sahra, 2014. "Multiple-item risk measures," Kiel Working Papers 1980, Kiel Institute for the World Economy (IfW Kiel).
    10. Jonathan P. Beauchamp & David Cesarini & Magnus Johannesson, 2017. "The psychometric and empirical properties of measures of risk preferences," Journal of Risk and Uncertainty, Springer, vol. 54(3), pages 203-237, June.
    11. Lönnqvist, Jan-Erik & Verkasalo, Markku & Walkowitz, Gari & Wichardt, Philipp C., 2015. "Measuring individual risk attitudes in the lab: Task or ask? An empirical comparison," Journal of Economic Behavior & Organization, Elsevier, vol. 119(C), pages 254-266.
    12. Allred, Sarah & Duffy, Sean & Smith, John, 2016. "Cognitive load and strategic sophistication," Journal of Economic Behavior & Organization, Elsevier, vol. 125(C), pages 162-178.
    13. Vieider, Ferdinand M. & Beyene, Abebe & Bluffstone, Randall & Dissanayake, Sahan & Gebreegziabher, Zenebe & Martinsson, Peter & Mekonnen, Alemu, 2014. "Measuring risk preferences in rural Ethiopia: Risk tolerance and exogenous income proxies," Discussion Papers, WZB Junior Research Group Risk and Development SP II 2014-401, WZB Berlin Social Science Center.
    14. Gary Charness & Catherine Eckel & Uri Gneezy & Agne Kajackaite, 2018. "Complexity in risk elicitation may affect the conclusions: A demonstration using gender differences," Journal of Risk and Uncertainty, Springer, vol. 56(1), pages 1-17, February.
    15. Ola Andersson & Håkan J. Holm & Jean-Robert Tyran & Erik Wengström, 2016. "Deciding for Others Reduces Loss Aversion," Management Science, INFORMS, vol. 62(1), pages 29-36, January.
    16. Adam Eric Greenberg, 2013. "When imagining future wealth influences risky decision making," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 8(3), pages 268-277, May.
    17. Vieider, Ferdinand M. & Truong, Nghi & Martinsson, Peter & Pham Khanh Nam & Martinsson, Peter, 2013. "Risk preferences and development revisited: A field experiment in Vietnam," Discussion Papers, WZB Junior Research Group Risk and Development SP II 2013-403, WZB Berlin Social Science Center.
    18. Deck, Cary & Jahedi, Salar, 2015. "The effect of cognitive load on economic decision making: A survey and new experiments," European Economic Review, Elsevier, vol. 78(C), pages 97-119.
    19. Tyran, Jean-Robert & Andersson, Ola & Holm, Håkan J. & Wengström, Erik, 2013. "Risking Other People?s Money," CEPR Discussion Papers 9743, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Risk preference; cognitive ability; experiment; noise;
    All these keywords.

    JEL classification:

    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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