Cognitive reflection test and behavioral biases in Malaysia

Judgment and Decision Making, Vol. 9, No. 2, March 2014, pp. 149–151 Cognitive reflection test and behavioral biases in Malaysia Mohamed Albaity∗ Mahfuzur Rahman† Islam Shahidul‡ Abstract We asked whether behavioral biases are related to cognitive abilities of Malaysian youth. Frederick’s three-item Cognitive Reflection Test was used to understand the role of behavioral biases concerning behavioral economics and finance. The sample (n = 880) comprised of university students from different parts of Malaysia. We found significant CRT differences as a function of gender, race and age groups. In addition, lower scores on the CRT are correlated positively with time preference and conservatism, but not with risk preference or the conjunction fallacy. Keywords: cognitive reflection test, behavioral biases, cognitive abilities. 1 Introduction Intelligence is related to reasoning performance, memory and response time as well as to life expectancy and earnings (Bruine de Bruin, Parker & Fischhoff, 2007; Chiesi, Primi &, Morsanyi, 2011; Frederick, 2005; Toplak, West & Stanovich, 2011). Similarly, studies have linked cognitive ability to economic behavior found that people with high cognitive abilities are less risk averse and more patient than low cognitive abilities people. However, West, Meserve and Stanovich (2012) noted that intelligence is not always related to cognitive biases. Some biases were found to be independent of intelligence. Frederick (2005) developed a tool that tests the tendency of individuals to fall into unreflective cognitive biases. The Cognition Reflection Test (CRT) poses three simple questions that trigger individuals to answer immediately and incorrectly. Toplak et al. (2011) found that, although CRT has a strong relationship with intelligence, it accounts for some of the variation in cognitive biases when other variables are controlled. Some studies that documented the connection between CRT and behavioral biases are Cokely and Feltz (2009), Oechssler, Roider and Schmitz (2009), Toplak, et al. (2011), and West et al. (2012). This study is aimed at using CRT questions to test whether the behavioral biases are related to cognitive abilities among Malaysians. Frederick (2005) in introducing the three items CRT to measure cognitive ability found that they are predictive of the type of choices individuals This research was funded by University of Malaya Postgraduate Research Grant (PPP) (PG112-2013B). Copyright: © 2013. The authors license this article under the terms of the Creative Commons Attribution 3.0 License. ∗ Faculty of Business and Accountancy, University Malaya, Malaysia. Email: . † Faculty of Business and Accountancy, University Malaya, Malaysia. Email: . ‡ Department of Sociology, Government M. M. College, Bangladesh. Email: . make. In addition, Frederick assessed time preference and found that individuals with high cognitive ability are more patient than the individuals with low cognitive ability. The present study directly investigates gender, race and age differences in Malaysia. The Malaysian population is a mixture of Malay, Chinese and Indians and this population has a mixture of four major religious affiliations. In addition, several behavioral biases are investigated: the conjunction fallacy, conservatism and risk and time preferences. In investigating the relationship between cognitive abilities and behavioral biases, Oechssler et al. (2009) found that CRT is related to the conjunction fallacy, conservatism, and time and risk preferences. Although an anchoring effect was found among the respondents, it was not related to CRT. The conjunction fallacy, or what is now known as “Linda problem”, is the bias where the probability of the conjunction of two or more events or their conjunction is thought to surpass the probability of one of the events. Tversky and Kahneman (1983) found that 85% of the participants committed the conjunction fallacy. Similarly Oechssler et al. (2009) found a significant difference between different groups in the conjunction fallacy. Conservatism refers to fact that individual tend to underestimate high probabilities and overestimate low ones (Hilbert 2012). Oechssler et al. (2009) found that respondents with low cognitive abilities significantly underestimated the correct probability more than respondents with high cognitive abilities. In addition, Oechessler et al. (2009), in testing risk preference, found that high CRT individual tend to choose options that are risk-neutral. Time preference concerns whether an individual prefers payment now or in the future if faced with two alternatives. Oechssler et al.(2009) found low CRT group to be less patient than high CRT group. The rationale of this study is derived from Albaity and Rahman (2012a,b), who study several behavioral traits of the Malaysian population. They found differences be- 148 Judgment and Decision Making, Vol. 9, No. 2 March 2014 Table 1: Demographic profile. Demographic characteristic Percentage CRT and biases in Malaysia 149 Table 2: Mean scores, standard deviation for CRT questions. Questions % Correct ans. % Wrong ans. Total mean Gender Race Female Male 58.3 41.7 Chinese Indian Malay Others 30.9 5.13 61.7 2.24 Nationality Malaysian Non Malaysian 71 29 Age 19.3 73.4 5.5 1.8 20 years old 21–30 years old 31–40 years old >41 years old tween races, religions and genders. Therefore this paper aims at investigating whether behavioral biases are related to cognitive abilities. We examine gender as well as ethnic group differences. 2 Data and methodology We distributed a questionnaire containing with the three CRT question plus questions targeting the behavioral biases of interest. The sample consists of undergraduate as well as postgraduate students from two public universities in Malaysia. Note that some of the students were continuing their education after being away from it for several years. The total number of questionnaire distributed was 1000; 898 questionnaires were returned, and 880 were usable for the analysis. (The rest had missing responses.) The question measuring the CRT and the four biases can be found in Appendix 1. We used English throughout, since the medium of instruction of the two public universities we used for this study are English. Besides, our respondents said that they were comfortable answering questionnaires in English. The CRT questions were adapted from Frederick (2005) and Oechssler et al. (2009). The questions were not foreign in nature to the respondents, in the sense that the correct answers were easily understood by the respondents when explained. 3 Results and discussions Table 1 reports the demographic profile of the respondents. Most of respondents were female (58.3%), Malay Bat & ball Widgets Lily pads 30.2 28.2 29.3 69.8 71.8 70.7 0.30 0.28 0.29 (61.7%), Malaysian (71%) and aged between 21 and 30 years old (73.4%). Table 2 shows the percentages of answers for each of the three CRT (...truncated)