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Does Everyone Use Probabilities? Intuitive and Rational Decisions about Stockholding


  • Binswanger, Johannes

    () (Tilburg University)

  • Salm, Martin

    () (Tilburg University)


We investigate the relationship between subjective probabilities of future stock market returns and decisions about stockholding. Specifically, we examine whether acting upon subjective probabilities is confined to individuals with high cognitive skills. We explore this question using data from the U.S. Health and Retirement Study (HRS). Our empirical analysis is guided by a novel and simple model based on the dual-systems framework from psychology (Kahneman, 2003). In our model, individuals with low cognitive skills make decisions in an intuitive non-probabilistic way based on cues and feelings. Individuals with high cognitive skills make decisions akin to the expected utility model. As predicted by our model, in our empirical analysis we find that there is a significantly stronger association between subjective return probabilities and stockholding decisions for individuals with high cognitive skills, compared to individuals with lower cognitive skills. The paper contributes to a better understanding of the role of cognitive skills in decision making under uncertainty.

Suggested Citation

  • Binswanger, Johannes & Salm, Martin, 2013. "Does Everyone Use Probabilities? Intuitive and Rational Decisions about Stockholding," IZA Discussion Papers 7265, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp7265

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    References listed on IDEAS

    1. Kapteyn, Arie & Kleinjans, Kristin J. & van Soest, Arthur, 2009. "Intertemporal consumption with directly measured welfare functions and subjective expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 425-437, October.
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    6. Francisco Gomes & Alexander Michaelides, 2005. "Optimal Life-Cycle Asset Allocation: Understanding the Empirical Evidence," Journal of Finance, American Finance Association, vol. 60(2), pages 869-904, April.
    7. Gan, Li & Gong, Guan & Hurd, Michael & McFadden, Daniel, 2015. "Subjective mortality risk and bequests," Journal of Econometrics, Elsevier, vol. 188(2), pages 514-525.
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    Cited by:

    1. Steffen Huck & Tobias Schmidt & Georg Weizsäcker, 2014. "The Standard Portfolio Choice Problem in Germany," SOEPpapers on Multidisciplinary Panel Data Research 650, DIW Berlin, The German Socio-Economic Panel (SOEP).
    2. Drerup, Tilman & Enke, Benjamin & von Gaudecker, Hans-Martin, 2014. "Measurement Error in Subjective Expectation and the Empirical Content of Economic Models," MEA discussion paper series 201414, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.

    More about this item


    subjective expectations; probabilities; dual system decision making; cognitive skills; cognitive economics;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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