Who is 'Behavioral'? Cognitive Ability and Anomalous Preferences

49 Pages Posted: 1 Mar 2005

See all articles by Daniel J. Benjamin

Daniel J. Benjamin

USC, Center for Economic and Social Research (CESR); National Bureau of Economic Research (NBER)

Sebastian A. Brown

Harvard University

Jesse M. Shapiro

Brown University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: May 5, 2006

Abstract

In this paper, we ask whether variation in preference anomalies is related to variation in cognitive ability. Evidence from a new laboratory study of Chilean high school students shows that small-stakes risk aversion and short-run discounting are less common among those with higher standardized test scores, although anomalies persist even among the highest-scoring individuals. The relationship with test scores does not appear to result from differences in parental education or wealth. A laboratory experiment shows that reducing cognitive resources using a cognitive load manipulation tends to exacerbate small-stakes risk aversion, with similar but statistically weaker effects on short-run impatience. Explicit reasoning about choice seems to reduce the prevalence of these anomalies, especially among the less skilled. Survey evidence suggests that the role of cognitive ability may extend to adult behaviors that are related to small-stakes risk preference and short-run time preference.

Keywords: cognitive ability, risk aversion, time preference, bounded rationality

JEL Classification: J24, D14, C91

Suggested Citation

Benjamin, Daniel J. and Brown, Sebastian Andres and Shapiro, Jesse M., Who is 'Behavioral'? Cognitive Ability and Anomalous Preferences (May 5, 2006). Available at SSRN: https://ssrn.com/abstract=675264 or http://dx.doi.org/10.2139/ssrn.675264

Daniel J. Benjamin

USC, Center for Economic and Social Research (CESR) ( email )

635 Downey Way
Los Angeles, CA 90089-3332
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sebastian Andres Brown

Harvard University ( email )

Cambridge, MA 02138
United States

Jesse M. Shapiro (Contact Author)

Brown University - Department of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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