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Probability Weighting and Cognitive Ability

Author

Listed:
  • Syngjoo Choi

    (Department of Economics, Seoul National University, Gwanak-gu, Seoul 08826, Korea (the Republic of))

  • Jeongbin Kim

    (National University of Singapore, Marketing, Singapore 119260, Singapore)

  • Eungik Lee

    (Department of Economics, New York University, New York, New York 10012)

  • Jungmin Lee

    (Department of Economics, Seoul National University, Gwanak-gu, Seoul 08826, Korea (the Republic of))

Abstract

Probability weighting is a major concept for accommodating systematic departures from expected utility theory. We examine the relation between probability weighting and cognitive ability with two experiments: one recruiting subjects with a large variation in cognitive ability and the other using the within-subject manipulation of time constraints in lottery choices and cognitive tests. We find a significant association between likelihood insensitivity—the cognitive component of probability weighting—and cognitive limitation such that subjects with a lower cognitive score or more interrupted cognition due to time pressure respond less discriminately to intermediate probabilities and more over-sensitively to extreme probabilities. Our findings shed light on the sources of anomalous choices against expected utility theory.

Suggested Citation

  • Syngjoo Choi & Jeongbin Kim & Eungik Lee & Jungmin Lee, 2022. "Probability Weighting and Cognitive Ability," Management Science, INFORMS, vol. 68(7), pages 5201-5215, July.
    • Handle: RePEc:inm:ormnsc:v:68:y:2022:i:7:p:5201-5215
    DOI: 10.1287/mnsc.2021.4146
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    2. Yu Gao & Zhenxing Huang & Ning Liu & Jia Yang, 2024. "Are physicians rational under ambiguity?," Journal of Risk and Uncertainty, Springer, vol. 68(2), pages 183-203, April.
    3. Choi, Syngjoo & Hahn, Kyu Sup & Kim, Byung-Yeon & Lee, Eungik & Lee, Jungmin & Lee, Sokbae, 2024. "North Korean refugees’ implicit bias against South Korea predicts market earnings," Journal of Development Economics, Elsevier, vol. 169(C).
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    More about this item

    Keywords

    probability weighting; cognitive ability; likelihood insensitivity; time pressure;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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