Are Risk Aversion and Impatience Related to Cognitive Ability?

54 Pages Posted: 23 Apr 2007

See all articles by Thomas J. Dohmen

Thomas J. Dohmen

Institute for the Study of Labor (IZA); Maastricht University - Business Investment Research Center (BIRC)

Armin Falk

University of Bonn - Economic Science Area; briq - Institute on Behavior & Inequality

David Huffman

IZA Institute of Labor Economics; Swarthmore College

Uwe Sunde

Ludwig Maximilian University of Munich (LMU)

Multiple version iconThere are 4 versions of this paper

Date Written: April 2007

Abstract

Is the way that people make risky choices, or tradeoffs over time, related to cognitive ability? This paper investigates whether there is a link between cognitive ability, risk aversion, and impatience, using a representative sample of the population and incentive compatible measures. We conduct choice experiments measuring risk aversion, and impatience over an annual time horizon, for a randomly drawn sample of roughly 1,000 German adults. Subjects also take part in two different tests of cognitive ability, which correspond to sub-modules of one of the most widely used IQ tests. Interviews are conducted in subjects' own homes. We find that lower cognitive ability is associated with significantly more impatient behavior in the experiments, and with greater risk aversion. This relationship is robust to controlling for personal characteristics, educational attainment, income, and measures of credit constraints. We perform a series of additional robustness checks, which help rule out other possible confounds.

Keywords: risk preference, time preference, cognitive ability, field experiment

JEL Classification: C93, D01, D80, D90, J24, J62

Suggested Citation

Dohmen, Thomas and Falk, Armin and Huffman, David and Sunde, Uwe, Are Risk Aversion and Impatience Related to Cognitive Ability? (April 2007). IZA Discussion Paper No. 2735, Available at SSRN: https://ssrn.com/abstract=982149 or http://dx.doi.org/10.2139/ssrn.982149

Thomas Dohmen (Contact Author)

Institute for the Study of Labor (IZA) ( email )

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

Maastricht University - Business Investment Research Center (BIRC) ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31-43-388 3832 (Phone)
+31-43-388 4856 (Fax)

Armin Falk

University of Bonn - Economic Science Area ( email )

briq - Institute on Behavior & Inequality

Schaumburg-Lippe-Straße 5-9
Bonn, 53113
Germany

HOME PAGE: http://www.briq-institute.org/

David Huffman

IZA Institute of Labor Economics ( email )

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

Swarthmore College

500 College Ave
Swarthmore, PA 19081
United States

Uwe Sunde

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

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