Cognitive abilities affect decision errors but not risk preferences: A meta-analysis

Abstract

When making risky decisions, people should evaluate the consequences and the chances of the outcome occurring. We examine the risk-preference hypothesis, which states that people’s cognitive abilities affect their evaluation of choice options and consequently their risk-taking behavior. We compared the risk-preference hypothesis against a parsimonious error hypothesis, which states that lower cognitive abilities increase decision errors. Increased decision errors can be misinterpreted as more risk-seeking behavior because in most risk-taking tasks, random choice behavior is often misclassified as risk-seeking behavior. We tested these two competing hypotheses against each other with a systematic literature review and a Bayesian meta-analysis summarizing the empirical correlations. Results based on 30 studies and 62 effect sizes revealed no credible association between cognitive abilities and risk aversion. Apparent correlations between cognitive abilities and risk aversion can be explained by biased risk-preference-elicitation tasks, where more errors are misinterpreted as specific risk preferences. In sum, the reported associations between cognitive abilities and risk preferences are spurious and mediated by a misinterpretation of erroneous choice behavior. This result also has general implications for any research area in which treatment effects, such as decreased cognitive attention or motivation, could increase decision errors and be misinterpreted as specific preference changes.

Conditionality of adaptiveness: Investigating the relationship between numeracy and adaptive behavior

“…However, in everyday life, one encounters more value-based situations than monetary problems. Also, value-based problems would help us distinguish between true preference and mistakes made while expressing that preference across varied numerically able participants (Mechera-Ostrovsky et al, 2022;Lilleholt, 2019;Drouvelis et al, 2020). Lastly, the current study used computational models to explore changes in decision strategy.…”

Farmers' risk preferences in 11 European farming systems: A multi‐country replication of Bocquého et al. (2014)

“…If the assumed size of the payment affects choices or noise, unobserved heterogeneity increases (because we do not know respondents' beliefs). While there is some evidence of stake size effects in ultimatum games (e.g., Andersen et al, 2011), the main concern with choices in risky gambles is noise (Camerer & Hogarth, 1999;Mechera-Ostrovsky et al, 2022). 5 In addition to these covariates, Bocquého et al (2014) included the proportion of the household income coming from another profession than farming, a dummy for deferred payments, a dummy for livestock, the proportion of idle land out of the arable area in 2009, a dummy if the farm has no successor despite looking for one, a dummy for farms located in the Northern part of the study area, and the importance of risk faced on soft wheat (1-5 score).…”

“…If the assumed size of the payment affects choices or noise, unobserved heterogeneity increases (because we do not know respondents' beliefs). While there is some evidence of stake size effects in ultimatum games (e.g., Andersen et al, 2011), the main concern with choices in risky gambles is noise (Camerer & Hogarth, 1999; Mechera‐Ostrovsky et al, 2022).…”

The effect of state and trait power on financial risk taking: The mediating and moderating roles of focus on rewards versus threats

“…Meanwhile, studies show that lack of power can impair executive functions (Smith et al, 2008). Lowered executive functions, in turn, are shown to increase decision errors in tasks such as Holt and Laury (2002), which can be mistakenly interpreted as specific risk preferences (for a meta‐analysis, see Mechera‐Ostrovsky et al, 2022). Further studies aiming to explore the link between power and the propensity to take risks could focus on the level of executive functions as a potential mediator of this relationship, as this might be potentially an alternative mechanism standing behind the link between power and risk taking.…”