IDEAS home Printed from https://ideas.repec.org/a/kap/jrisku/v46y2013i3p299-320.html
   My bibliography  Save this article

Bias and brains: Risk aversion and cognitive ability across real and hypothetical settings

Author

Listed:
  • Matthew Taylor

Abstract

I collect data on subjects’ risk attitudes using real and hypothetical risky choices. I also measure their cognitive ability using the cognitive reflective test (CRT). On average, measured risk preferences are not significantly different across real and hypothetical settings. However, cognitive ability is inversely related to risk aversion when choices are hypothetical, but it is unrelated when the choices are real. This interaction between cognitive ability and hypothetical setting is consistent with the notion that some individuals, specifically higher-ability individuals, may treat hypothetical choices as “puzzles,” and provides one potential explanation for why some studies find that subjects indicate that they are more tolerant of risk when they make hypothetical choices than when they make real choices. Copyright Springer Science+Business Media New York 2013

Suggested Citation

  • Matthew Taylor, 2013. "Bias and brains: Risk aversion and cognitive ability across real and hypothetical settings," Journal of Risk and Uncertainty, Springer, vol. 46(3), pages 299-320, June.
    • Handle: RePEc:kap:jrisku:v:46:y:2013:i:3:p:299-320
    DOI: 10.1007/s11166-013-9166-8
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s11166-013-9166-8
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11166-013-9166-8?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde, 2010. "Are Risk Aversion and Impatience Related to Cognitive Ability?," American Economic Review, American Economic Association, vol. 100(3), pages 1238-1260, June.
    2. Schkade David A. & Payne John W., 1994. "How People Respond to Contingent Valuation Questions: A Verbal Protocol Analysis of Willingness to Pay for an Environmental Regulation," Journal of Environmental Economics and Management, Elsevier, vol. 26(1), pages 88-109, January.
    3. Green, Donald & Jacowitz, Karen E. & Kahneman, Daniel & McFadden, Daniel, 1998. "Referendum contingent valuation, anchoring, and willingness to pay for public goods," Resource and Energy Economics, Elsevier, vol. 20(2), pages 85-116, June.
    4. Camerer, Colin F & Hogarth, Robin M, 1999. "The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 7-42, December.
    5. Xavier Gabaix & David Laibson & Guillermo Moloche & Stephen Weinberg, 2006. "Costly Information Acquisition: Experimental Analysis of a Boundedly Rational Model," American Economic Review, American Economic Association, vol. 96(4), pages 1043-1068, September.
    6. Glenn W. Harrison & Morten I. Lau & E. Elisabet Rutström, 2007. "Estimating Risk Attitudes in Denmark: A Field Experiment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(2), pages 341-368, June.
    7. Chilton, S. M. & Hutchinson, W. G., 2003. "A qualitative examination of how respondents in a contingent valuation study rationalise their WTP responses to an increase in the quantity of the environmental good," Journal of Economic Psychology, Elsevier, vol. 24(1), pages 65-75, February.
    8. Charles A. Holt & Susan K. Laury, 2005. "Risk Aversion and Incentive Effects: New Data without Order Effects," American Economic Review, American Economic Association, vol. 95(3), pages 902-912, June.
    9. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
    10. Oechssler, Jörg & Roider, Andreas & Schmitz, Patrick W., 2009. "Cognitive abilities and behavioral biases," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 147-152, October.
    11. Quang Nguyen & Colin Camerer & Tomomi Tanaka, 2010. "Risk and Time Preferences Linking Experimental and Household Data from Vietnam," Post-Print halshs-00547090, HAL.
    12. Harrison, Glenn W. & Lau, Morten I. & Elisabet Rutström, E., 2009. "Risk attitudes, randomization to treatment, and self-selection into experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 70(3), pages 498-507, June.
    13. Costa-Gomes, Miguel & Crawford, Vincent P & Broseta, Bruno, 2001. "Cognition and Behavior in Normal-Form Games: An Experimental Study," Econometrica, Econometric Society, vol. 69(5), pages 1193-1235, September.
    14. Rachel Croson & Uri Gneezy, 2009. "Gender Differences in Preferences," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 448-474, June.
    15. Chetan Dave & Catherine Eckel & Cathleen Johnson & Christian Rojas, 2010. "Eliciting risk preferences: When is simple better?," Journal of Risk and Uncertainty, Springer, vol. 41(3), pages 219-243, December.
    16. 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.
    17. Steffen Andersen & Glenn W. Harrison & Morten I. Lau & E. Elisabet Rutström, 2008. "Eliciting Risk and Time Preferences," Econometrica, Econometric Society, vol. 76(3), pages 583-618, May.
    18. John D. Hey & Chris Orme, 2018. "Investigating Generalizations Of Expected Utility Theory Using Experimental Data," World Scientific Book Chapters, in: Experiments in Economics Decision Making and Markets, chapter 3, pages 63-98, World Scientific Publishing Co. Pte. Ltd..
    19. Tomomi Tanaka & Colin F. Camerer & Quang Nguyen, 2010. "Risk and Time Preferences: Linking Experimental and Household Survey Data from Vietnam," American Economic Review, American Economic Association, vol. 100(1), pages 557-571, March.
    20. Anderson, Lisa R. & Mellor, Jennifer M., 2008. "Predicting health behaviors with an experimental measure of risk preference," Journal of Health Economics, Elsevier, vol. 27(5), pages 1260-1274, September.
    21. Beattie, Jane & Loomes, Graham, 1997. "The Impact of Incentives upon Risky Choice Experiments," Journal of Risk and Uncertainty, Springer, vol. 14(2), pages 155-168, March.
    22. repec:cup:judgdm:v:5:y:2010:i:3:p:182-191 is not listed on IDEAS
    23. Oechssler, Jörg & Roider, Andreas & Schmitz, Patrick W., 2009. "Cognitive Abilities and Behavioral Biases," Working Papers 0465, University of Heidelberg, Department of Economics.
    24. Battalio, Raymond C & Kagel, John H & Jiranyakul, Komain, 1990. "Testing between Alternative Models of Choice under Uncertainty: Some Initial Results," Journal of Risk and Uncertainty, Springer, vol. 3(1), pages 25-50, March.
    25. Eckel, Catherine C. & Wilson, Rick K., 2004. "Is trust a risky decision?," Journal of Economic Behavior & Organization, Elsevier, vol. 55(4), pages 447-465, December.
    26. Glenn W. Harrison & Eric Johnson & Melayne M. McInnes & E. Elisabet Rutström, 2005. "Risk Aversion and Incentive Effects: Comment," American Economic Review, American Economic Association, vol. 95(3), pages 897-901, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Galizzi, Matteo M. & Machado, Sara R. & Miniaci, Raffaele, 2016. "Temporal stability, cross-validity, and external validity of risk preferences measures: experimental evidence from a UK representative sample," LSE Research Online Documents on Economics 67554, London School of Economics and Political Science, LSE Library.
    2. Kerri Brick & Martine Visser & Justine Burns, 2012. "Risk Aversion: Experimental Evidence from South African Fishing Communities," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(1), pages 133-152.
    3. Galizzi, Matteo M. & Miraldo, Marisa & Stavropoulou, Charitini & van der Pol, Marjon, 2016. "Doctor–patient differences in risk and time preferences: A field experiment," Journal of Health Economics, Elsevier, vol. 50(C), pages 171-182.
    4. Thomas Meissner & Xavier Gassmann & Corinne Faure & Joachim Schleich, 2023. "Individual characteristics associated with risk and time preferences: A multi country representative survey," Journal of Risk and Uncertainty, Springer, vol. 66(1), pages 77-107, February.
    5. Matthew P. Taylor, 2017. "Information Acquisition Under Risky Conditions Across Real And Hypothetical Settings," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 352-367, January.
    6. 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.
    7. Jonathan Chapman & Erik Snowberg & Stephanie Wang & Colin Camerer, 2018. "Loss Attitudes in the U.S. Population: Evidence from Dynamically Optimized Sequential Experimentation (DOSE)," NBER Working Papers 25072, National Bureau of Economic Research, Inc.
    8. 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.
    9. Ola Andersson & Håkan J. Holm & Jean-Robert Tyran & Erik Wengström, 2020. "Robust inference in risk elicitation tasks," Journal of Risk and Uncertainty, Springer, vol. 61(3), pages 195-209, December.
    10. Menkhoff, Lukas & Sakha, Sahra, 2017. "Estimating risky behavior with multiple-item risk measures," Journal of Economic Psychology, Elsevier, vol. 59(C), pages 59-86.
    11. repec:cup:judgdm:v:14:y:2019:i:5:p:591-604 is not listed on IDEAS
    12. Muhammad Sajid & Matthew C. Li, 2019. "The role of cognitive reflection in decision making: Evidence from Pakistani managers," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 14(5), pages 591-604, September.
    13. Galarza, Francisco, 2009. "Choices under Risk in Rural Peru," MPRA Paper 17708, University Library of Munich, Germany.
    14. Tamás Csermely & Alexander Rabas, 2016. "How to reveal people’s preferences: Comparing time consistency and predictive power of multiple price list risk elicitation methods," Journal of Risk and Uncertainty, Springer, vol. 53(2), pages 107-136, December.
    15. Holzmeister, Felix & Stefan, Matthias, 2019. "The Risk Elicitation Puzzle Revisited: Across-Methods (In)consistency?," OSF Preprints pj9u2, Center for Open Science.
    16. Felix Holzmeister & Matthias Stefan, 2019. "The risk elicitation puzzle revisited: Across-methods (in)consistency?," Working Papers 2019-19, Faculty of Economics and Statistics, Universität Innsbruck.
    17. Andersson, Ola & Tyran, Jean-Robert & Wengström, Erik & Holm, Håkan J., 2013. "Risk Aversion Relates to Cognitive Ability: Fact or Fiction?," Working Paper Series 964, Research Institute of Industrial Economics.
    18. Menkhoff, Lukas & Sakha, Sahra, 2014. "Multiple-item risk measures," Kiel Working Papers 1980, Kiel Institute for the World Economy (IfW Kiel).
    19. Taylor, Matthew P., 2016. "Are high-ability individuals really more tolerant of risk? A test of the relationship between risk aversion and cognitive ability," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 63(C), pages 136-147.
    20. 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.
    21. Felix Holzmeister & Matthias Stefan, 2021. "The risk elicitation puzzle revisited: Across-methods (in)consistency?," Experimental Economics, Springer;Economic Science Association, vol. 24(2), pages 593-616, June.

    More about this item

    Keywords

    Risk aversion; Decision making; Hypothetical bias; Stated preference; Revealed preference; C91; D80; D83;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:jrisku:v:46:y:2013:i:3:p:299-320. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.