genanyan_waggitt - Sean Waggitt Vardan Genanyan Econ 140B...

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Sean Waggitt Vardan Genanyan Econ 140B Are Risk Aversion and Impatience Related to Cognitive Ability? By Thomas Dohmen, Armin Falk, David Huffman, and Uwe Sunde Introduction Many economic models make assumptions about people’s ability to reason and make rational decisions. In the paper “Are Risk Aversion and Impatience Related to Cognitive Ability?” the authors try to discover if there is a connection between a person’s cognitive ability and their willingness to take risks, and also whether a correlation exists between cognitive ability and impatience. Although risk aversion and impatience predict a wide range of economic outcome, and cognitive ability has shown to affect labor market outcomes in terms of higher wages for higher cognitive ability, economic models typically assume that cognitive ability is independent from both risk aversion and impatience. The Experiment The data set for this paper was compiled using a controlled experiment. The sample size was randomly drawn from the population in Germany. Approximately 1,000 people were used in the experiment. Interviews in the style of a German Socioeconomic Panel Study were conducted in the subject’s home using laptop computers to fill out surveys and participate in the experiments. The interviewer then gave the subject a survey to collect data about personal characteristics, such as age, gender and height, as wells as other important economic variables, such as income and education. A two part IQ test is also included in the questionnaire for subjects that are willing to participate. One part of the cognitive ability test is a symbol-digit matching test, where the subject is to match as many symbols and numbers as they can in 90 seconds. The second part of the test is a word fluency test where the subject names as many animals as they can in 90 seconds. Both tests relate to processing speed, an important part of cognitive ability that measures how well other high level cognitive tasks are performed, as well as highlights the changes in cognitive ability that come with aging. After the test was completed, the subject was invited to participate in one of two experiments, which the computer randomly chose. One experiment was a lottery experiment designed to measure the extent of risk aversion and the other was an intertemporal choice experiment designed to elicit impatience over an annual time frame. Each participant was told beforehand that they have a 1 out of 7 chance of winning a cash prize from the experiment’s results, thus inducing the participants to choose according to their true preferences. Also, since both experiments require the subject to make choices in multiple situations, the computer randomly chooses one of the situations that will potentially decide the amount of the prize winnings. The lottery experiment presents multiple rows where the subject needs to choose between
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This note was uploaded on 09/04/2011 for the course ECON 140b taught by Professor Staff during the Winter '08 term at UCSB.

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genanyan_waggitt - Sean Waggitt Vardan Genanyan Econ 140B...

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