Cognitive Ability and Decision-making
By Arnold Kling
Using data from the National Longitudinal Survey of Youth (NLSY), we show that individuals with greater cognitive skills make consumption and personal financial decisions that more closely resemble the predictions of economic theory. Individuals with greater cognitive ability are more likely to participate in financial markets, are more knowledgeable about their pension plans, accumulate more wealth, and are more likely to participate in tax-deferred savings programs.
Thanks to Tyler Cowen for the pointer.
The authors find evidence suggesting that people can learn to make choices relative to risk more rationally. The survey article on neuroeconomics to which I pointed recently also says that when people are made aware of better ways to make choices they choose more rationally.
For Discussion. If preferences (or at least choices) are influenced by knowledge and education, how serious a problem is this for standard economic analysis?