Working Paper: CEPR ID: DP6852
Authors: Thomas J. Dohmen; Armin Falk; David Huffman; Uwe Sunde
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 greater risk aversion, and more pronounced impatience. These relationships are significant, and 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: Cognitive Ability; Field Experiment; Risk Preference; Time Preference
JEL Codes: C93; D01; D80; D90; J24; J62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower cognitive ability (D91) | greater risk aversion (D81) |
| lower cognitive ability (D91) | more pronounced impatience (E41) |
| higher cognitive ability (D91) | higher willingness to take risks (G40) |
| higher cognitive ability (D91) | greater patience (D15) |
| cognitive ability (G53) | education or income (I24) |
| cognitive ability (G53) | personality traits (D91) |