Cognitive reflection as a predictor of susceptibility to behavioral anomalies

Judgment and Decision Making, Vol. 11, No. 1, January 2016, pp. 114–120 Cognitive reflection as a predictor of susceptibility to behavioral anomalies Mohammad Noori∗ Abstract To study the effect of cognitive reflection on behavioral anomalies, we used the cognitive reflection test to measure cognitive reflection. The study was conducted on 395 Iranian university students and shows that subjects with lower cognitive reflection are significantly more likely to exhibit the conjunction fallacy, illusion of control, overconfidence, base rate fallacy, and conservatism. In addition, test scores are correlated with risk preferences. The results do not show any relationship between cognitive reflection and self-serving bias or status quo bias. We also find that gender is significantly related to illusion of control and self-serving bias. Keywords: cognitive reflection, behavioral finance, decision making, behavioral anomalies, gender. 1 Introduction After Frederick (2005) introduced the Cognitive Reflection Test (CRT), a number of researchers studied the relationship between cognitive reflection and behavioral biases. Frederick (2005) shows that individuals with high CRT scores are generally more willing to be patient and willing to gamble in domain of gains; Benjamin, Brown and Shapiro (2006) and Slonim, Carlson and Bettinger (2007) found similar relationships. Oechssler, Roider and Schmitz (2009) found that subjects with low CRT scores exhibited the conjunction fallacy and conservatism more often than subjects with high CRT scores. They specifically posit that “. . . people with higher cognitive abilities might save more and receive higher expected returns; potentially leading them to play a more pronounced role in financial markets than subjects with lower cognitive abilities”. Hoppe and Kusterer (2011) find that CRT is predictive of susceptibility to the base rate fallacy and conservatism. They postulate that CRT is instrumental only when there is a correct solution for the bias through analytical calculations. Moreover, Hoppe and Kusterer report that the endowment effect is not correlated with CRT scores. Albaity, Rahman and Shahidul (2014) also replicate the relationship between cognitive reflection and behavioral biases with Malaysian subjects. The main finding of this literature is that cognitive reflection is predictive I would like to express my sincerest thanks to Dr. Mohammad Hasan Ebrahimi Sarv Olia and Farhad Noori for their suggestions and helpful opinions. I must thank an anonymous reviewer. I would like to show my gratitude to the students of Allameh Tabataba’i University, Amirkabir University of Technology and Sharif University of Technology. I also thank professor Jonathan Baron, the editor of journal for his opinions and comments. Copyright: © 2015. The authors license this article under the terms of the Creative Commons Attribution 3.0 License. ∗ Allameh Tabataba’i University. Email: ; . of susceptibility to behavioral anomalies, though cognitive reflection is not the only predictor. This study investigates the relationship between cognitive reflection and behavioral anomalies in Iran. It includes the status quo bias, illusion of control, and self-serving bias. We use the CRT (Frederick, 2005) as a measure of cognitive reflection, as it is hypothesized to measure the System 2 decision-making abilities in dual process theory. This theory differentiates between two types of thinking: System 1 thinking or intuition, which corresponds to intuitive judgments that are fast and automatic, and System 2 thinking or reasoning, which applies to the class of problems which require reasoning and are subject to conscious judgments (Kahneman, 2003). The current study replicates the earlier studies and their main findings regarding the conjunction fallacy (Hoppe & Kusterer, 2011; Oechssler et al., 2009), overconfidence (Hoppe & Kusterer, 2011), the base rate fallacy (Hoppe & Kusterer, 2011), conservatism (Albaity et al., 2014; Hoppe & Kusterer, 2011; Oechssler et al., 2009), and risk preferences (Frederick, 2005; Oechssler et al., 2009). The results show that these biases are significantly related to CRT scores. Regarding overconfidence, subjects with higher CRT scores have a significantly more precise self-assessment (Hoppe & Kusterer, 2011), and subjects with lower test scores tend to be significantly overconfident. There is no evidence that self-serving bias and CRT scores are correlated. Further, CRT scores do not indicate any relationship with time preference and the status quo bias. This paper introduces a new topic, which is the relationship between gender and behavioral anomalies. The results show that female subjects are significantly more likely to exhibit illusion of control and the self-serving bias in decision making contexts. 114 Judgment and Decision Making, Vol. 11, No. 1, January 2016 Cognitive reflection 115 Table 1: CRT scores, by location. Proportion by score “High” Location “Low” Mean CRT Score 3 2 1 0 N Sharif University of Technology Amirkabir University of Technology Allameh Tabataba’i University 2.42 2.17 1.18 60.4% 46.1% 19.9% 22.4% 33.9% 18.5% 16.4% 11.3% 23.3% 0.7% 8.7% 38.4% 134 115 146 Overall 1.89 41.3% 24.3% 17.5% 17.0% 395 Table 2: Distribution of answers to CRT questions Question Bat and balls Widgets Lily pads Reflective Impulsive Others 68.9% 61.5% 59.5% 2 Method Four hundred and ten university students from three universities (Allameh Tabataba’i University, Amirkabir University of Technology, and Sharif University of Technology) participated in the research and completed a questionnaire (15 students did not complete the questionnaire, so the results are based on 395 subjects). I distributed a questionnaire with the CRT and tests of cognitive biases. (The Appendix provides an English translation.) The data were collected during February to June, 2015. The average age of the subjects was 22.4 (SD=3.62), and 63% of subjects were male (249 subjects). Additionally, 66.3% were bachelor’s students, 29.6% master’s students, and the remaining 4.1% were doctoral students. Subjects who correctly answered 2 or 3 CRT questions were paid 30 thousand rials, with 259 subjects receiving this payment. 2.1 Cognitive reflection test The CRT (Frederick, 2005) is a three-item test with two types of answers for each question: a reflective answer and an impulsive answer. The CRT includes the following questions. • A bat and a ball together cost 110 cents. The bat costs 100 cents more than the ball. How much does the ball cost? (impulsive answer: 10 cents; reflective answer: 5 cents). • If it takes 5 machines 5 minutes to make 5 widgets, how long would it take 100 machines to make 100 widgets? 26.1% 29.4% 25.8% 5.1% 9.1% 14.7% (impulsive answer: 100 min; reflective answer: 5 min). • In a lake, there is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, h (...truncated)