Do as I Do, Not as I Say: Incentivization and the Relationship Between Cognitive Ability and Risk Aversion

Almeida, Sergio

doi:10.5935/0034-7140.20190019

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Revista Brasileira de Economia

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Articles • Rev. Bras. Econ. 73 (4) • Oct-Dec 2019 • https://doi.org/10.5935/0034-7140.20190019 copy

Do as I Do, Not as I Say: Incentivization and the Relationship Between Cognitive Ability and Risk Aversion^* * We are grateful to Robin Cubitt, Martin Sefton and Simon Gachter for their invaluable guidance and detailed suggestions. We are also grateful to Bruno Campos and Bruno Siqueira for their excellent research assistance. We are grateful to the Brazilian Federal Research Agency (CAPES), Nottingham School of Economics (UK) and the Research Council of the State of Sao Paulo (FAPESP) for support to this study.

Authorship SCIMAGO INSTITUTIONS RANKINGS

Abstract

We study the relationship between cognitive ability and risk aversion under real and hypothetical choice conditions. Our experimental results suggest that the statistical relationship between cognitive ability and risk aversion is sensitive to incentive conditions of the choice problems used to elicit risk preferences. Individuals in the upper tail of the cognitive ability distribution are willing to take more risks. However, this holds only when choices involve hypothetical payoffs. When choices envolve monetary incentives, this correlation is not significant. Results are robust to using alternative measures of cognitive ability.

Keywords:
Cognitive ability; risk-preference elicitation; risk-preferences; hypothetical and real choices; incentives

Lottery	Prize 1	Prize 2
L1	20	20
L2	10	40
L3	5	50
L4	0	60
L5	-10	80
L6	-30	100

	Mean	(se)	Standard-deviation
Demographics
Male	0.599	(0.035)	0.491
White	0.705	(0.032)	0.457
Black	0.170	(0.027)	0.377
Age (in years)	22.249	(0.256)	3.599
Socio-economic background
Head of household has college degree or more	0.716	(0.032)	0.452
Household per-capita income above 4 minimum-wages	0.435	(0.035)	0.497
Household with 4 or 5 members	0.533	(0.036)	0.500
Household more than 5 members	0.086	(0.020)	0.282
Field of study
Social Sciences	0.574	(0.035)	0.496
Exact and Biological Sciences	0.066	(0.018)	0.249
Economics major	0.203	(0.029)	0.403
Cognitive ability
Cognitive Reflection Test scores (0-3)	1,954	(0.075)	1,051
Fluid Intelligence Test raw scores (0-12)	7,827	(0.117)	1.635
Fluid Intelligence Test difficulty-weighted scores (0-12)	5,932	(0.138)	1.936
Choices
Risky option (incentivized choice)	0.751	(0.031)	0.432
Risky option (hypothetical choice)	0.858	(0.025)	0.349
Observations	197

Lottery	Prize 1 (x)	Pr (x)	Prize 2 (y)	Pr (y)
L1	8	0.3	4	0.7
L2	16	0.2	10	0.8
L3	6	0.4	3	0.6
L4	9	0.3	4	0.7
L5	9	0.2	3	0.8
L6	6	0.3	3	0.7

	Mean	(se)	Standard-deviation
Demographics
Male	0.472	(0.049)	0.502
White	0.623	(0.047)	0.487
Age (in years)	19.943	(0.154)	1.585
Socio-economic background
Head of household has MSc degree or more	0.302	(0.045)	0.461
Household income > £15,000	0.170	(0.037)	0.377
Field of study
Social Sciences	0.406	(0.048)	0.493
Exact Sciences	0.189	(0.038)	0.393
Cognitive ability
Cognitive Reflection Test scores (0-3)	0.915	(0.096)	0.987
Quantitative reasoning raw scores (0-3)	0.915	(0.075)	0.770
Sequential reasoning raw scores (0-3)	2.500	(0.057)	0.590
Choices
Proportion of risky options in 12 tasks (incentivized choice)	0.691	(0.025)	0.462
Observations		106

	Incentivized risk-elicitation task			Hypothetical risk-elicitation task
	Proportion picking risky option (1)	Proportion picking risky option (2)	Proportion picking risky option (3)	Proportion picking risky option (4)	Proportion picking risky option (5)	Proportion picking risky option (6)
Panel A: Dichotomized cognitive-ability measures
High-ability (above median CRT score)	0.792 ^ significance at 5%. (0.0515)	-		0.872 ^ significance at 5%. (0.0474)	-
Low-ability (below median CRT score)	0.736 ^ significance at 5%. (0.0833)	-		0.733 ^ significance at 5%. (0.0551)	-
High Vs. Low Difference	0.056 (0.0786)	-	0.055 (0.0792)	0.138 ^ significance at 5%. (0.0698)	-	0.132 ^* * indicates significance at 10%, and (0.0731)
High-ability (above median Fluid-intelligence score)	-	0.788^ significance at 5%. (0.0659)		-	0.876 ^ significance at 5%. (0.0474)
Low-ability (below median Fluid-intelligence score)	-	0.764 ^ significance at 5%. (0.0557)		-	0.792 (0.0445)
High Vs. Low Difference	-	0.024 (0.0554)	0.0203 (0.0550)	-	0.084 ^ significance at 5%. (0.0392)	0.0740 ^* * indicates significance at 10%, and (0.0386)
F-Test joint significance p-value			0.0320 0.7325			7.2900 0.0045 ^ significance at 5%.
Panel B: Continuous measures of cognitive ability
CRT score (0-3)			0.0309 (0.0361)			0.0733 ^ significance at 5%. (0.0250)
Fluid-intelligence z-score			0.0079 (0.0416)			0.0701 ^ significance at 5%. (0.0248)
F-Test joint significance p-value			0.37 0.6981			11.84 0.0005 ^ significance at 5%.

		Incentivized risk-elicitation tasks
	Proportion picking risky option (CRT only) (1)	Proportion picking risky option (Quant. Reasoning only) (2)	Proportion picking risky option (Seq. Reasoning only) (3)	Proportion picking risky option (All cognitive) (4)
High-ability (above median CRT score)	0.713 ^ significance at 5%.	-	-
	(0.0389)
Low-ability (below median CRT score)	0.683 ^ significance at 5%.	-	-
	(0.0240)
High Vs. Low Difference	0.030	-	-	0.027
	(0.0480)			(0.0478)
High-ability (above median quantitative reasoning score)	-	0.710 ^ significance at 5%.	-
		(0.0498)
Low-ability (below median quantitative reasoning score)	-	0.685 ^ significance at 5%.	-
		(0.0207)
High Vs. Low Difference	-	0.025	-	0.0218
		(0.0553)		(0.0525)
High-ability (above median sequential reasoning score)	-	-	0.682 ^ significance at 5%.
			(0.0404)
Low-ability (below median sequential reasoning score)	-	-	0.701 ^ significance at 5%.
			(0.0400)
High Vs. Low Difference	-	-	-0.019	-0.0201
			(0.0699)	(0.0698)
F-Test joint significance				0.34
p-value				0.7945

	Incentivized risk-elicitation tasks			Hypothetical risk-elicitation task
	Proportion picking risky option (1)	Proportion picking risky option (2)	Proportion picking risky option (3)	Proportion picking risky option (4)	Proportion picking risky option (5)	Proportion picking risky option (6)
Panel A: Experiment 1 (197 subjects), linear probability regression analysis
High CRT Vs. Low CRT Difference	0.031 (0.0747)		0.033 (0.0776)	0.128 ^* * indicates significance at 10%, and (0.0689)		0.123 ^* * indicates significance at 10%, and (0.0719)
High fluid-intelligence Vs. Low fluid-intelligence Difference		0.020 (0.0606)	0.017 (0.0595)		0.061 (0.0386)	0.049 (0.0392)
F-Test joint significance p-value			0.1300 0.8806			5.1000 0.0168 ^ significance at 5%.
Panel B: Experiment 1 (197 subjects), linear probability regression analysis with continuous measures of cognitive ability
CRT score (0-3)			0.021 (0.0345)			0.068 ^ significance at 5%. (0.0245)
Fluid-intelligence z-score			0.004 (0.0479)			0.051 ^ significance at 5%. (0.0236)
F-Test joint significance p-value			0.1900 0.8256			11.2700 0.0006 ^ significance at 5%.
Panel C: Experiment 2 (106 subjects), generalized linear model analysis
High CRT Vs. Low CRT Difference	-0.006 (0.0526)	-	-0.006 (0.0529
High quantitative-reasoning Vs. Low quantitative-reasoning Difference	-	0.002 (0.0633)	0.004 (0.0605)
High sequential-reasoning Vs. Low sequential-reasoning Difference	-		-0.015 (0.0708)
F-Test joint significance p-value			0.07 0.9955

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Lottery	Prize 1 (x)	Pr (x)	Prize 2 (y)	Pr (y)
L1	8	0.3	4	0.7
L2	16	0.2	10	0.8
L3	6	0.4	3	0.6
L4	9	0.3	4	0.7
L5	9	0.2	3	0.8
L6	6	0.3	3	0.7

Lottery	Prize 1 (x)	Pr (x)	Prize 2 (y)	Pr (y)
L1	8	0.3	4	0.7
L2	16	0.2	10	0.8
L3	6	0.4	3	0.6
L4	9	0.3	4	0.7
L5	9	0.2	3	0.8
L6	6	0.3	3	0.7

Lottery	Prize 1 (x)	Pr (x)	Prize 2 (y)	Pr (y)
L1	8	0.3	4	0.7
L2	16	0.2	10	0.8
L3	6	0.4	3	0.6
L4	9	0.3	4	0.7
L5	9	0.2	3	0.8
L6	6	0.3	3	0.7