Wednesday, November 04, 2009

Risk Aversion, Impatience & Cognitive Ability

Are Risk Aversion and Impatience Related to Cognitive Ability?
Dohmen Thomas,Falk Armin,Huffman David

This paper investigates whether risk aversion and impatience are correlated with cognitive ability. We conduct incentive compatible choice experiments measuring risk aversion, and impatience over an annual time horizon, for a representative sample of roughly 1,000 German adults. A measure of cognitive ability is provided by two submodules 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 statistically and economically significant, and robust to controlling for personal characteristics, educational attainment, income, and measures of liquidity constraints.


Charles Frith said...

Surely this would imply that criminals have higher cognitive ability?

Kevin Denny said...

Other things being equal, I suppose yes. Maybe they do. And remember other things are not equal so you would have to control for other factors like, say, SES. The problem with criminals is that one tends to have information only on the ones who are caught & hence who are probably not representative i.e. the dumber ones.

Charles Frith said...

Creative Idea: "Mmm. It's so yummy I could steal it"

Erm... Walkers Crisps anyone?

Charles Frith said...

Yes. I half thought of that but its great to have a half baked thought articulated by someone else. Or at least life is easier :)

Michael Daly said...

"The correlation between cognitive ability and risk aversion is -0.233"
Could this study really be saying- mathematical ability predicts understanding of probabilty based games, it also predicts intelligence, therefore intelligent people make wiser choices on mathematical risk games?

Charles Frith said...

Clever people prefer clever games?

Kevin Denny said...

I am not sure how risk aversion is measured in the paper as, needless to say, I haven't read it. But I know what it means in economics in general. Essentially in economics we assume people are smart & informed so their risk taking behaviour is a reflection of their risk aversion. However if you allow for stupidity it gets complicated. Because someone might really be risk averse but take risks because simply they have miscalculated so we might infer that they are not risk averse. It could go the other way too, if they miscalculate in the other direction.
In an experiment you might be able to control some of these things by making sure subjects know what the pay-offs were.
To understand criminality standard neo-classical risk aversion may not be sufficient: ideas like loss aversion maybe necessary.