DP6852 Are Risk Aversion and Impatience Related to Cognitive Ability?

Author(s): Thomas J Dohmen , Armin Falk , David Huffman , Uwe Sunde

Publication Date: June 2008

Keyword(s): Risk Preference , Time Preference , Cognitive Ability , Field Experiment

JEL(s): C93 , D01 , D80 , D90 , J24 , J62

Programme Areas: Labour Economics

Link to this Page: www.cepr.org/pubs/dps/DP6852.asp.asp

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.