On the Relationship between Cognitive Ability and Risk Preference

Abstract

This paper will focus on the relationship between cognitive ability and decision-making under risk and uncertainty. Taken as a whole, this research indicates that cognitive ability is associated with risk-taking behavior in various contexts and life domains, including incentivized choices between lotteries in controlled environments, behavior in nonexperimental settings, and self-reported tendency to take risks. One pattern that emerges frequently in these studies is that cognitive ability tends to be positively correlated with avoidance of harmful risky situations, but it tends to be negatively correlated with risk aversion in advantageous situations. We conclude by discussing perspectives for future research, in particular the scope for the development of richer sets of elicitation instruments and measurement across a wider range of concepts.

Some Contributions of Economics to the Study of Personality

“…48 Risk and time preferences are also related to cognitive ability; however, the relationship is likely weaker. Higher cognitive ability is associated with more patient behavior (see for example Dohmen et al, 2018 andJagelka, 2018). The effect of cognitive skills on risk aversion is more controversial and there have been studies which found a positive, negative or no link (see Dohmen et al, 2018 for a recent summary of the literature).…”

The Value of a Statistical Life for Risk‐Averse and Risk‐Seeking Individuals

“…A novel paper in using hypothetical measures of risk aversion as well 4 For North America, it has been found that estimates from highquality stated-preference studies tend to be close to those from HWN studies (Robinson & Hammitt, 2016). 5 Risk preferences are typically elicited using observed real behaviors (e.g., smoking behavior, alcohol drinking status), survey measures of hypothetical behaviors (e.g., hypothetical gambles), or self-reported willingness to take risks (Dohmen, Falk, Huffman, & Sunde, 2018). as observed behaviors is Hammitt and Haninger (2010). Recent empirical developments in this line are scarce, although an ambiguous effect of health in the VSL has been found (Hammitt, 2017).…”

“…Risk preferences are typically elicited using observed real behaviors (e.g., smoking behavior, alcohol drinking status), survey measures of hypothetical behaviors (e.g., hypothetical gambles), or self‐reported willingness to take risks (Dohmen, Falk, Huffman, & Sunde, ).…”

Time Preferences and Their Life Outcome Correlates: Evidence from a Representative Survey

“…Frederick et al (2002) report a similarly wide range of individual discount rates in their survey. 14 There are studies (e.g Dohmen et al, 2010Dohmen et al, , 2018b. that document a positive relation between cognitive abilities and risk taking.…”