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Cognitive Abilities and Behavioral Biases

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  • Jörg Oechssler
  • Andreas Roider
  • Patrick W. Schmitz

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 and conservatism in updating probabilities. Test scores are also significantly related to subjects' time and risk preferences. Test scores have no influence on the amount of anchoring, although there is evidence of anchoring among all subjects. Even if incidences of most biases are lower for people with higher cognitive abilities, they still remain substantial.

Suggested Citation

  • Jörg Oechssler & Andreas Roider & Patrick W. Schmitz, 2009. "Cognitive Abilities and Behavioral Biases," Post-Print hal-00696620, HAL.
  • Handle: RePEc:hal:journl:hal-00696620
    DOI: 10.1016/j.jebo.2009.04.018
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00696620
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    More about this item

    Keywords

    C91; D80; D90; J24; Behavioral finance; Biases; Cognitive abilities; Cognitive reflection test;
    All these keywords.

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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