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Are smarter people really less risk averse?

Author

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  • Sergio Sousa

    (University of Nottingham)

Abstract

Using hypothetical lottery choices to measure risk preferences, Frederick (2005) finds that higher cognitive ability is associated with less risk aversion. This paper documents, however, that when using an incentive compatible measure of risk preference, attitudes towards risk are not associated to cognitive ability as measured by Frederick’s (2005) three-item cognitive reflection test. This is a new finding that adds weight to the claim that lack of proper financial incentives can sometimes be a source of bias. In addition, we show that this lack of association between risk preferences and cognitive ability is robust to using a broader measure of cognitive ability that takes into account both verbal and non-verbal reasoning skills. Our results suggest the possibility that whether cognitive ability relates to attitudes towards risk is sensitive to instruments used to measure both of them.

Suggested Citation

  • Sergio Sousa, 2010. "Are smarter people really less risk averse?," Discussion Papers 2010-17, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    • Handle: RePEc:not:notcdx:2010-17
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    File URL: https://www.nottingham.ac.uk/cedex/documents/papers/2010-17.pdf
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    Cited by:

    1. Amador, Luis & Brañas-Garza, Pablo & Espín, Antonio M. & Garcia, Teresa & Hernández, Ana, 2019. "Consistent and inconsistent choices under uncertainty: The role of cognitive abilities," MPRA Paper 95178, University Library of Munich, Germany.
    2. Amador-Hidalgo, Luis & Brañas-Garza, Pablo & Espín, Antonio M. & García-Muñoz, Teresa & Hernández-Román, Ana, 2021. "Cognitive abilities and risk-taking: Errors, not preferences," European Economic Review, Elsevier, vol. 134(C).
    3. Ola Andersson & Håkan J. Holm & Jean-Robert Tyran & Erik Wengström, 2016. "Risk Aversion Relates To Cognitive Ability: Preferences Or Noise?," Journal of the European Economic Association, European Economic Association, vol. 14(5), pages 1129-1154, October.
    4. 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.
    5. Nicolas Eber & Patrick Roger & Tristan Roger, 2024. "Finance and intelligence: An overview of the literature," Journal of Economic Surveys, Wiley Blackwell, vol. 38(2), pages 503-554, April.
    6. Hernán Bejarano & Francisco Galarza, 2016. "Can cognitive skills and risk aversion explain inconsistent choices? An experiment," Working Papers 16-03, Centro de Investigación, Universidad del Pacífico.
    7. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde, 2018. "On the Relationship between Cognitive Ability and Risk Preference," Journal of Economic Perspectives, American Economic Association, vol. 32(2), pages 115-134, Spring.

    More about this item

    Keywords

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    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D00 - Microeconomics - - General - - - General

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