the elephan in the corner of decision research

Would you go for the sure bet -- say, a guaranteed $100, or a 75% chance on $200? How about receiving $3,400 this month, or waiting two months to get $3,800?

People have widely varying tastes for risk, and different levels of patience. Decision researchers have known this for a while. But Shane Frederick’s work puts a new spin on the subject. With a deceptively simple “cognitive reflection test (CRT),” Frederick has come up with a way of predicting individuals’ predilections for risk-taking.

Frederick found 3,000 plus subjects -- mostly university students across the U.S. – to answer his three CRT questions, as well as to respond to a survey on financial gambles and other risk-based decisions. The CRT, which he describes as functioning like an IQ test, tends to elicit impulsive, erroneous answers. Here’s one sample question: A bat and a ball cost $1.10 in total. The bat costs $1 more than the ball. How much does the ball cost? The intuitive answer is 10 cents. The correct answer is 5 cents.

Frederick discovered striking correlations between individuals scoring correctly on all three CRT questions, and their tendency to take financial gambles. For instance, almost a third of the high scorers preferred a 1% chance at $5,000 than a guaranteed $60. He also found a connection between high scores and patience around financial outcomes.

Sharp distinctions between men and women emerged from his data. 80% of high scoring men prefer a 15% chance at $1 million over a certain $500, versus 38% of high scoring women.the relation between IQ and decision making strategies,

A video lecture is available at: http://mitworld.mit.edu/stream/378/