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Cognitive abilities and risk taking: the role of preferences

Author

Listed:
  • Michalis Drouvelis

    (University of Birmingham)

  • Johannes Lohse

    (University of Birmingham)

Abstract
A growing literature in economics suggests that cognitive abilities and risk preferences could be related. However, since neither risk preferences nor cognitive abilities can be observed directly, it is unclear whether measured associations point towards a true relationship or instead result from systematic measurement errors. Previous studies, which have raised this concern, only test this proposition indirectly. In this paper, we complement their approach by providing a direct test that sheds light on the existence and direction of a link between risk preferences and cognitive abilities once systematic measurement errors are taken into account. Using a lab experiment that employs a repeated choice design, we give participants the opportunity to revise an initial choice made in a simple lottery task. We measure cognitive abilities via the cognitive reflection task and affect individuals' access to cognitive resources by exogenously varying their cognitive load across treatments. Our results provide evidence that cognitive abilities remain strongly correlated with risk preferences after errors are controlled for.

Suggested Citation

  • Michalis Drouvelis & Johannes Lohse, 2020. "Cognitive abilities and risk taking: the role of preferences," Discussion Papers 20-02, Department of Economics, University of Birmingham.
    • Handle: RePEc:bir:birmec:20-02
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    References listed on IDEAS

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    Cited by:

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    2. Mondal, Supratik & Traczyk, Jakub, 2023. "Conditionality of adaptiveness: Investigating the relationship between numeracy and adaptive behavior," Journal of Economic Psychology, Elsevier, vol. 96(C).

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    More about this item

    Keywords

    cognitive abilities; risk preferences; repeated choice design; experiment;
    All these keywords.

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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