Investigating inconsistencies in complex lotteries: The role of cognitive skills of low-numeracy subjects

Bruns, Selina; Hermann, Daniel; Mußhoff, Oliver

doi:10.1016/j.socec.2022.101840

Cited by 4 publications

(1 citation statement)

References 30 publications

(42 reference statements)

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“…28 On a methodological point of view, Dave et al (2010) argue that when evaluating risk preferences, simpler tasks should be preferred for subjects who exhibit low cognitive skills while more complex tasks should be favored only for high-ability subjects. 29 Burks et al (2009), Dave et al (2010), Taylor (2016), Chapman et al (2018) and Bruns et al (2022) also observe more inconsistent choices among low-ability subjects. 30 More specifically, looking both at laboratory and real-world evidence and relying on both studies of behavior in risky situations by psychologists and psychiatrists and studies on economic decision-making by economists, Dohmen et al (2018, p. 120) conclude that "Cognitive ability tends to be positively correlated with avoidance of harmful risky situations and to be negatively correlated with risk aversion in advantageous situations".…”

Section: E N D N O T E Smentioning

confidence: 85%

Finance and intelligence: An overview of the literature

Eber,

Roger,

Roger

2023

Journal of Economic Surveys

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Do more intelligent investors take better economic decisions than less intelligent ones? Is risk attitude, in particular risk/loss aversion, linked to cognitive ability? Does an investor's cognitive ability impact his/her patience? Is financial performance positively linked to investor's intelligence? These research questions have become highly relevant with the development of behavioral economics and behavioral finance, following the recognition that humans are not homo economicus. This paper reviews the several strands of literature devoted to answering the above questions. We first discuss the barely debated definitions and measures of intelligence/cognitive ability used in psychology, economics, and finance. We then review the results related to the (controversial) link between risk aversion and cognitive ability. We observe that the literature provides clear results for patience; individuals with a higher level of cognitive ability being more patient on average. Finally, we review the contributions linking (successfully or not) portfolio choice and financial performance to cognitive ability.

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