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Cognitive Abilities and Behavioral Biases

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  • Oechssler, Jörg

    ()
    (Heidelberg University)

  • Roider, Andreas

    ()
    (University of Regensburg)

  • Schmitz, Patrick W.

    ()
    (University of Cologne)

Abstract

We use a simple, three-item test for cognitive abilities to investigate whether established behavioral biases that play a prominent role in behavioral economics and finance are related to cognitive abilities. We find that higher test scores on the Cognitive Reflection Test of Frederick (2005) indeed are correlated with lower incidences of the conjunction fallacy, conservatism in updating probabilities, and overconfidence. Test scores are also significantly related to subjects’ time and risk preferences. We find no influence on anchoring. However, even if biases are lower for people with higher cognitive abilities, they still remain substantial.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3481.

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Length: 15 pages
Date of creation: May 2008
Date of revision:
Handle: RePEc:iza:izadps:dp3481

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Keywords: cognitive abilities; biases; behavioral finance; cognitive reflection test;

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  1. Christelis, Dimitris & Jappelli, Tullio & Padula, Mario, 2006. "Cognitive Abilities and Portfolio Choice," CEPR Discussion Papers 5735, C.E.P.R. Discussion Papers.
  2. Mathias Drehmann & Jörg Oechssler & Andreas Roider, 2002. "Herding and Contrarian Behavior in Financial Markets - An Internet Experiment," Bonn Econ Discussion Papers bgse25_2002, University of Bonn, Germany, revised Apr 2003.
  3. Drehmann, Mathias & Oechssler, Jorg & Roider, Andreas, 2007. "Herding with and without payoff externalities -- an internet experiment," International Journal of Industrial Organization, Elsevier, vol. 25(2), pages 391-415, April.
  4. Barberis, Nicholas & Thaler, Richard, 2003. "A survey of behavioral finance," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128 Elsevier.
  5. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272.
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  9. Dohmen, Thomas J & Falk, Armin & Huffman, David & Sunde, Uwe, 2008. "Are Risk Aversion and Impatience Related to Cognitive Ability?," CEPR Discussion Papers 6852, C.E.P.R. Discussion Papers.
  10. Brañas-Garza, Pablo & Guillen, Pablo & del Paso, Rafael López, 2008. "Math skills and risk attitudes," Economics Letters, Elsevier, vol. 99(2), pages 332-336, May.
  11. Shane Frederick, 2005. "Cognitive Reflection and Decision Making," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 25-42, Fall.
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