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Cognitive Abilities and Behavioral Biases

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  • Oechssler, Jörg

    ()
    (Department of Economics, University of Heidelberg)

  • Roider, Andreas

    ()
    (Department of Economics, University of Heidelberg)

  • Schmitz, Patrick W.

    ()
    (Staatswissenschaftliches Seminar, Universität Köln)

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 Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 08-05.

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Length: 13 pages
Date of creation: 19 May 2008
Date of revision:
Handle: RePEc:xrs:sfbmaa:08-05

Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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  1. 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.
  2. Dimitrios Christelis & Tullio Jappelli & Mario Padula, 2006. "Cognitive Abilities and Portfolio Choice," CSEF Working Papers 157, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  3. Oechssler, Jörg & Roider, Andreas & Schmitz, Patrick W., 2009. "Cooling-Off in Negotiations - Does It Work?," Working Papers 0463, University of Heidelberg, Department of Economics.
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  5. Mathias Drehmann & J�rg Oechssler & Andreas Roider, 2005. "Herding and Contrarian Behavior in Financial Markets: An Internet Experiment," American Economic Review, American Economic Association, vol. 95(5), pages 1403-1426, December.
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  8. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August.
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  10. Summers, Lawrence H, 1986. " Does the Stock Market Rationally Reflect Fundamental Values?," Journal of Finance, American Finance Association, vol. 41(3), pages 591-601, July.
  11. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272, Octomber.
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