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Does everyone use probabilities? The role of cognitive skills
Journal
European Economic Review
ISSN
00142921
Type
journal article
Date Issued
2017
Author(s)
Salm, Martin
Abstract
What is the role of cognitive skills in decision making under uncertainty? We address this question by examining the relationship between responses to survey questions about sub-jective probabilities of stock market returns and stock holding decisions. Based on data from the Health and Retirement Study (HRS), we find that for individuals with lower cognitive skills the association between measured probabilities and decisions is weaker than for individuals with higher cognitive skills. Additional evidence suggests that individuals with lower cognitive skills are more likely to give heuristic answers to questions about stock return probabilities. A likely explanation is that individuals with lower cognitive skills have a fuzzier mental representation of stock returns that cannot be captured by a unique well-defined probability distribution. In contrast, individuals with higher cognitive skills are more likely to act as if subjective probabilities are meaningful measures of uncertainty. We discuss wheth-er or not the behavior of the latter can be seen as more “rational”.
Language
English
HSG Classification
contribution to scientific community
HSG Profile Area
None
Refereed
Yes
Volume
98
Start page
73
End page
85
Official URL
Subject(s)
Contact Email Address
johannes.binswanger@unisg.ch
Eprints ID
255452