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Cognitive Abilities and Behavioral Biases

Oechssler, Jörg and Roider, Andreas and Schmitz, Patrick W.

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Abstract

We use a simple, three-item test for cognitive abilities to investigate whether established behavioral biases that play a prominent role in behavioral economics and finance are related to cognitive abilities. We find that higher test scores on the Cognitive Reflection Test of Frederick (2005) indeed are correlated with lower incidences of the conjunction fallacy, conservatism in updating probabil-ities, and overconfidence. Test scores are also significantly related to subjects' time and risk preferences. We find no influence on anchoring. However, even if biases are lower for people with higher cognitive abilities, they still remain substantial.

Item Type: Working paper
Date Deposited: 12 May 2009 12:56
Date: 2008
Faculties / Institutes: The Faculty of Economics and Social Studies > Alfred-Weber-Institut for Economics
Subjects: 330 Economics
Uncontrolled Keywords: behavioral finance , biases , cognitive abilities , cognitive reflection test
Schriftenreihe ID: Discussion Paper Series / University of Heidelberg, Department of Economics
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