Cognitive Abilities and Behavioral Biases

15 Pages Posted: 3 Nov 2008

See all articles by Joerg Oechssler

Joerg Oechssler

University of Heidelberg - Alfred Weber Institute for Economics

Andreas Roider

University of Regensburg - Department of Economics and Econometrics; IZA Institute of Labor Economics

Patrick W. Schmitz

University of Cologne; Centre for Economic Policy Research (CEPR)

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, conservatism in updating probabilities, 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.

Keywords: behavioral finance, biases, cognitive abilities, cognitive reflection test

JEL Classification: C91, D80, D90, J24

Suggested Citation

Oechssler, Joerg and Roider, Andreas and Schmitz, Patrick W., Cognitive Abilities and Behavioral Biases. IZA Discussion Paper No. 3481. Available at SSRN: https://ssrn.com/abstract=1294555 or http://dx.doi.org/10.1111/j.0042-7092.2007.00700.x

Joerg Oechssler (Contact Author)

University of Heidelberg - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany
+49 6221 54 3548 (Phone)
+49 6221 54 3630 (Fax)

HOME PAGE: http://www.awi.uni-heidelberg.de/with2/theorie2/Team/Oechssler/Oechssler_main.html

Andreas Roider

University of Regensburg - Department of Economics and Econometrics ( email )

Universitaetsstrasse 31
D-93040 Regensburg
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Patrick W. Schmitz

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

HOME PAGE: http://schmitz.uni-koeln.de/index.php?s=mitarbeiter&t=schmitz

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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