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Are Risk Aversion and Impatience Related to Cognitive Ability?

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Author Info
Thomas Dohmen () (IZA)
Armin Falk () (IZA, University of Bonn and CEPR)
David Huffman () (IZA)
Uwe Sunde () (IZA, University of Bonn and CEPR)

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Abstract

Is the way that people make risky choices, or tradeoffs over time, related to cognitive ability? This paper investigates whether there is a link between cognitive ability, risk aversion, and impatience, using a representative sample of the population and incentive compatible measures. We conduct choice experiments measuring risk aversion, and impatience over an annual time horizon, for a randomly drawn sample of roughly 1,000 German adults. Subjects also take part in two different tests of cognitive ability, which correspond to sub-modules of one of the most widely used IQ tests. Interviews are conducted in subjects' own homes. We find that lower cognitive ability is associated with significantly more impatient behavior in the experiments, and with greater risk aversion. This relationship is robust to controlling for personal characteristics, educational attainment, income, and measures of credit constraints. We perform a series of additional robustness checks, which help rule out other possible confounds.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2735.

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Length: 54 pages
Date of creation: Apr 2007
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Handle: RePEc:iza:izadps:dp2735

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Related research
Keywords: risk preference time preference cognitive ability field experiment

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Find related papers by JEL classification:
C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
D90 - Microeconomics - - Intertemporal Choice and Growth - - - General
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
J62 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Job, Occupational and Intergenerational Mobility; Promotion

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  1. Maarten van Rooij & Annamaria Lusardi & Rob Alessie, 2007. "Financial Literacy and Stock Market Participation," Working Papers 07-23, Utrecht School of Economics. [Downloadable!]
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  2. Matthew Rabin & Georg Weizsäcker, 2007. "Narrow Bracketing and Dominated Choices," IZA Discussion Papers 3040, Institute for the Study of Labor (IZA). [Downloadable!]
  3. Joerg Oechssler & Andreas Roider & Patrick W. Schmitz, 2008. "Cognitive Abilities and Behavioral Biases," Working Papers 0465, University of Heidelberg, Department of Economics, revised May 2008. [Downloadable!]
    Other versions:
  4. Burnham, Terence C. & Cesarini, David & Wallace, Björn & Johannesson, Magnus & Lichtenstein, Paul, 2007. "Billiards and Brains: Cognitive Ability and Behavior in a p-Beauty Contest," Working Paper Series in Economics and Finance 684, Stockholm School of Economics. [Downloadable!]
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