Comparing decisions under compound risk and ambiguity: The importance of cognitive skills

Abstract

ISBN 978-80-7343-330-7 (Univerzita Karlova. Centrum pro ekonomický výzkum a doktorské studium) ISBN 978-80-7344-322-1 (Akademie věd České republiky. Národohospodářský ústav) Comparing Decisions under Compound Risk and Ambiguity: The Importance of Cognitive Skills

Cognitive abilities and economic behavior

“…The measures of cognitive ability include well-known measures, such as the Cognitive Reflection Test (CRT; Frederick, 2005 ) 5 and the Raven Progressive Matrices ( Raven, 1936;Raven et al, 20 0 0 ). On the other hand, papers in this SI also employ less-standard measures of cognitive ability, including success at a strategic board game ( Baghestanian and Frey, 2016 ), a working memory test and an arithmetic test ( Prokosheva, 2016 ), Faith in Intuition ( Alós-Ferrer and Hügelschäfer, 2016 ), the Red Hat puzzle ( Bayer and Renou, 2016a ), and success in the Hit 15 game ( Rustichini et al, 2016 ).…”

“…Additionally, the authors find a correlation between the CRT outcomes and personality measures, which begs the question of exactly what does CRT measure. Prokosheva (2016) investigates the relationship between ambiguity aversion and the reduction of compound lotteries, and whether this relationship is affected by the cognitive ability of the subject. The author employs two measures of cognitive ability: a working memory test and an arithmetic test.…”

Attitudes to Risk and Uncertainty: New Insights From an Experiment Using Interval Prospects

“…Reynaud and Couture (2012), in their comparison of Eckel and Grossman (EG) vs Holt and Laury (HL), also report that risk preferences are affected by elicitation methods. Prokosheva (2016) and Ihli et al (2013) corroborate this argument by documenting inconsistency in elicitation methods. Other studies have documented different estimates of risk aversion from different elicitation methods.…”

On the Psychological Foundations of Ambiguity and Compound Risk Aversion

“…A natural starting point for our inquiry is the existence of a strong empirical regularity that appears to connect attitudes towards compound risk and ambiguity. Starting with Halevy (2007), a growing experimental literature documents a large correlation between ambiguity aversion and compound risk aversion 2 (Abdellaoui, Klibanoff, and Placido, 2015;Armantier and Treich, 2016;Prokosheva, 2016;Chew, Miao, and Zhong, 2017;Aydogan, Berger, and Bosetti, 2019;Dean and Ortoleva, 2019;Gillen, Snowberg, and Yariv, 2019;Schneider and Schonger, 2019;and Berger and Bosetti, 2020). For example, controlling for measurement error and the associated attenuation bias, Gillen, Snowberg, and Yariv (2019) find that the correlation between compound risk aversion and ambiguity aversion is 0.86.…”