IQ, Expectations, and Choice

76 Pages Posted: 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 1, 2019

Abstract

Forecast errors for inflation decline monotonically with both verbal and quantitative IQ in a large and representative male population. Within individuals, inflation 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 1, 2019). Chicago Booth Research Paper No. 19-20; Fama-Miller Working Paper. Available at SSRN: https://ssrn.com/abstract=3451486 or http://dx.doi.org/10.2139/ssrn.3451486

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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