Who is 'Behavioral'? Cognitive Ability and Anomalous Preferences
49 Pages Posted: 1 Mar 2005
Date Written: May 5, 2006
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: Suggested Citation