Does everyone use probabilities? The role of cognitive skills
Binswanger,J.S. Salm,Martin
Binswanger,J.S.
Salm,Martin
Abstract
What is the role of cognitive skills in decision making under uncertainty? We address this question by examining the relationship between responses to survey questions about subjective probabilities of stock market returns and stock holding decisions. Based on data from the Health and Retirement Study (HRS), we find that for individuals with lower cognitive skills the association between measured probabilities and decisions is weaker than for individuals with higher cognitive skills. Additional evidence suggests that individuals with lower cognitive skills are more likely to give heuristic answers to questions about stock return probabilities. A likely explanation is that individuals with lower cognitive skills have a fuzzier mental representation of stock returns that cannot be captured by a unique well-defined probability distribution. In contrast, individuals with higher cognitive skills are more likely to act as if subjective probabilities are meaningful measures of uncertainty. We discuss whether or not the behavior of the latter can be seen as more “rational”.
Description
Date
2017-09
Journal Title
Journal ISSN
Volume Title
Publisher
Research Projects
Organizational Units
Journal Issue
Keywords
subjective probabilities, cognitive skills, choice under uncertainty, ambiguity, D03 - Behavioral Microeconomics ; Underlying Principles, D81 - Criteria for Decision-Making under Risk and Uncertainty, D84 - Expectations ; Speculations, G11 - Portfolio Choice ; Investment Decisions
Citation
Binswanger, J S & Salm, M 2017, 'Does everyone use probabilities? The role of cognitive skills', European Economic Review, vol. 98, pp. 73-85. https://doi.org/10.1016/j.euroecorev.2017.06.009
License
info:eu-repo/semantics/closedAccess