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Cognitive Abilities and Behavioral Biases

  • Oechssler, Jörg
  • Roider, Andreas
  • Schmitz, Patrick W.

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 probabil-ities, 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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Paper provided by University of Heidelberg, Department of Economics in its series Working Papers with number 0465.

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Date of creation: 12 May 2009
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Handle: RePEc:awi:wpaper:0465
Note: This paper is part of http://archiv.ub.uni-heidelberg.de/volltextserver/view/schriftenreihen/sr-3.html
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  1. Mathias Drehmann & Joerg Oechssler & Andreas Roider, 2002. "Herding and Contrarian Behavior in Financial Markets - An Internet Experiment," Finance 0210005, EconWPA.
  2. 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.
  3. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde, 2009. "Are Risk Aversion and Impatience Related to Cognitive Ability?," CESifo Working Paper Series 2620, CESifo Group Munich.
  4. Abreu, Dilip & Brunnermeier, Markus K., 2002. "Synchronization risk and delayed arbitrage," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 341-360.
  5. Slonim, Robert & Carlson, James & Bettinger, Eric, 2007. "Possession and discounting behavior," Economics Letters, Elsevier, vol. 97(3), pages 215-221, December.
  6. Christelis, Dimitris & Jappelli, Tullio & Padula, Mario, 2006. "Cognitive Abilities and Portfolio Choice," CEPR Discussion Papers 5735, C.E.P.R. Discussion Papers.
  7. Daniel J. Benjamin & Sebastian A. Brown & Jesse M. Shapiro, 2013. "Who Is ‘Behavioral’? Cognitive Ability And Anomalous Preferences," Journal of the European Economic Association, European Economic Association, vol. 11(6), pages 1231-1255, December.
  8. Shane Frederick, 2005. "Cognitive Reflection and Decision Making," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 25-42, Fall.
  9. Oechssler, Jörg & Roider, Andreas & Schmitz, Patrick W, 2008. "Cooling-Off in Negotiations - Does It Work?," CEPR Discussion Papers 6807, C.E.P.R. Discussion Papers.
  10. Mathias Drehmann & Jörg Oechssler & Andreas Roider, 2004. "Herding with and without Payoff Externalities - An Internet Experiment," Bonn Econ Discussion Papers bgse15_2004, University of Bonn, Germany.
  11. 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.
  12. Nicholas Barberis & Richard Thaler, 2002. "A Survey of Behavioral Finance," NBER Working Papers 9222, National Bureau of Economic Research, Inc.
  13. Andrei Shleifer ad Robert W. Vishny, 1995. "The Limits of Arbitrage," Harvard Institute of Economic Research Working Papers 1725, Harvard - Institute of Economic Research.
  14. 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.
  15. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272, March.
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