IQ, Expectations, and Choice

76 Pages Posted: 31 Jan 2019 Last revised: 12 Sep 2019

See all articles by Francesco D'Acunto

Francesco D'Acunto

Boston College

Daniel Hoang

Karlsruhe Institute of Technology (KIT)

Maritta Paloviita

Bank of Finland - Research

Michael Weber

University of Chicago - Finance

Multiple version iconThere are 4 versions of this paper

Date Written: September 2019

Abstract

Forecast errors for inflation decline monotonically with both verbal and quantitative IQ in a large and representative male population. Within individuals, in expectations and perceptions are autocorrelated only for men above the median by IQ (high-IQ men). High-IQ men's forecast revisions are consistent with the diagnostic-expectations framework, whereas anything goes for low-IQ men. Education levels, income, socioeconomic status, or financial constraints do not explain these results. Using ad-hoc tasks in a controlled environment, we investigate the channels behind these results. Low-IQ individuals' knowledge of the concept of inflation is low; they associate inflation with concrete goods and services instead of abstract economic concepts, and are less capable of forecasting mean-reverting processes. Differences in expectations formation by IQ feed into choice|only high-IQ men plan to spend more when expecting higher inflation as the consumer Euler equation prescribes. Our results have implications for heterogeneous-beliefs models of consumption, saving, and investment.

Keywords: Behavioral Macroeconomics, Heterogeneous Beliefs, Limited Cognition, Expectations Formation, Household Finance

JEL Classification: D12, D84, D91, E21, E31, E32, E52, E65

Suggested Citation

D'Acunto, Francesco and Hoang, Daniel and Paloviita, Maritta and Weber, Michael, IQ, Expectations, and Choice (September 2019). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2019-08. Available at SSRN: https://ssrn.com/abstract=3326123 or http://dx.doi.org/10.2139/ssrn.3326123

Francesco D'Acunto

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Daniel Hoang

Karlsruhe Institute of Technology (KIT) ( email )

Karlsruhe
Germany

Maritta Paloviita

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland
+358 9 1831 (Phone)
+358 9 1832560 (Fax)

Michael Weber (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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