Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2013:9: Risk Aversion Relates to Cognitive Ability: Fact or Fiction?

Ola Andersson (), Jean-Robert Tyran (), Erik Wengström () and Håkan J. Holm ()
Additional contact information
Ola Andersson: Research Institute of Industrial Economics (IFN)
Jean-Robert Tyran: Department of Economics, University of Vienna
Erik Wengström: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Håkan J. Holm: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

Abstract: Recent experimental studies suggest that risk aversion is negatively related to cognitive ability. In this paper we report evidence that this relation might be spurious. We recruit a large subject pool drawn from the general Danish population for our experiment. By presenting subjects with choice tasks that vary the bias induced by random choices, we are able to generate both negative and positive correlations between risk aversion and cognitive ability. Structural estimation allowing for heterogeneity of noise yields no significant relation between risk aversion and cognitive ability. Our results suggest that cognitive ability is related to random decision making rather than to risk preferences.

Keywords: Risk preference; cognitive ability; experiment; noise

JEL-codes: C81; C91; D12; D81

38 pages, First version: April 12, 2013. Revised: October 21, 2013.

Full text files

WP13_9.pdf PDF-file 
WP13_9_appendix.pdf PDF-file Appendix

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