Cognitive ability and risk aversion: A systematic review and meta analysis

Judgment and Decision Making, Vol. 14, No. 3, May 2019, pp. 234–279 Cognitive ability and risk aversion: A systematic review and meta analysis Lau Lilleholt∗ Abstract Are highly intelligent people less risk averse? Over the last two decades scholars have argued the existence of a negative relationship between cognitive ability and risk aversion. Although numerous studies support this, the link between cognitive ability and risk aversion has not been found consistently. To shed new light on this topic, a systematic review and meta-analysis was conducted. A total of 97 studies were identified and included for meta-analysis in the domain of gains (N=90,723), 41 in the mixed domain (N=50,936), and 12 in the domain of losses (N=4,544). Results indicate that there exists a weak, but significant negative relationship between cognitive ability and risk aversion in the domain of gains. However, no relationship was observed in the mixed domain or in the domain of losses. Several meta-regressions were performed to investigate the influence of moderator variables. None of the moderator variables were found to consistently influence the relationship between cognitive ability and risk aversion across the domain of gains, mixed and losses. Moreover, no significant difference was observed between males and females across all three domains. In conclusion, this systematic review and meta-analysis provides new evidence that the relationship between cognitive ability and risk aversion is domain specific and not as strong as suggested by some previous studies. Keywords: risk aversion, cognitive ability, risk preferences, intelligence, meta-analysis 1 Introduction In economic theory, risk aversion is assumed to be a key determinant of human decision making. Naturally, the study of risk aversion has gained a lot of attention, attracting researchers from all over the world. For the past two decades, a number of scholars have argued that highly intelligent individuals tend to be less risk averse (Benjamin, Brown & Shapiro, 2013; Dohmen, Falk, Huffman & Sunde, 2010, 2018; Frederick, 2005), and thus more likely to optimize their choices in line with the normative benchmark of Expected Utility Theory (Rabin, 2000; Rabin & Thaler, 2001). Although a substantial amount of empirical evidence supports this conclusion (Dohmen et al., 2018), several studies do not find cognitive ability to be consistently related to risk aversion. For instance, some studies have found cognitive ability to be negatively related to risk aversion in the domain of gains but positively related in the mixed domain (Burks, Carpenter, Goette & Rustichini, 2009; Chapman, Snowberg, Wang, & Camerer, 2018). Similarly, Andersson, Holm, Tyran and Wengström (2016), concluded that the relationship might be spurious and dependent on the choice architecture of the decision task used to elicit risk preferences. Specifically, they reported a negative relationship when the percentage of alternative responses indicating risk aversion was set to 80% and a positive relationship when this was set to 50%. A potential explanation for this result is that people with low cognitive ability tend to make more random errors, leading risk aversion to be overestimated for this group when the percentage of alternatives permitting a choice indicating risk aversion is high, while underestimated when the opposite is the case (Andersson et al., 2016). Finally, several studies suggest that the negative relationship between cognitive ability and risk aversion exists only when the decision task used to elicit risk aversion is unincentivized and purely hypothetical (Sousa & Rangel, 2014; Taylor, 2013, 2016). In summary, it is unclear whether a negative relationship actually exists, and if so, to what extent. The purpose of this study is to investigate the nature of the relationship between cognitive ability and risk aversion, through a systematic literature review and meta-analysis. The remainder of this article is organized as follows. First, a brief definition of cognitive ability and risk aversion is provided. Next, several theoretical explanations for why cognitive ability and risk aversion might be negatively related are presented, followed by an outline of the present investigation. Then the literature review and meta-analysis are discussed. 1.1 Copyright: © 2019. The authors license this article under the terms of the Creative Commons Attribution 3.0 License. ∗ Department of Psychology, University of Copenhagen, Øster Farimagsgade 2A, 1353 København K, Denmark. Defining Cognitive Ability and Risk Aversion When conducting a systematic literature review and metaanalysis it is important to define the key variables of interest 234 Judgment and Decision Making, Vol. 14, No. 3, May 2019 (Borenstein, Hedges, Higgins & Rothstein, 2009; Cooper, 2010). Cognitive ability is one of the best researched, yet most controversial constructs within the field of psychology (Eysenck, 1998; Freund & Kasten, 2012; Sternberg, 1985). In general terms, cognitive ability is considered an extensive category, encompassing a wide range of abilities such as reasoning, problem solving and abstract thinking (Gottfredson, 1997). Throughout the history of the field, several influential scholars have attempted to converge on a single definition of the construct (Carroll, 1997; Freund & Kasten, 2012). Although no uniform definition of cognitive ability exists, Murphy and Davidshofer (1998) provides a definition that has proven useful in applied psychology (e.g., Seijts & Crim, 2009; Yeo & Neal, 2004). In line with their definition, cognitive ability will for the purposes of this study be defined as individual differences in the capacity to successfully perform tasks that require the manipulation, retrieval, evaluation or processing of mental information. This definition is closely related to what psychologists refer to as g or general cognitive ability, a factor considered to be the core of, and primary source of variance common to, cognitive abilities and cognitive ability tests (Spearman, 1904a; Yeo & Neal, 2004). Based on the definition put forward by Fox, Erner and Walters (2016), an individual will for the purposes of this study be considered risk averse if he or she prefers a certain or risky option to a riskier option with equal or higher expected value. Conversely, an individual will be considered risk seeking, if he/she prefers a risky option to a certain or less risky option with higher expected value. 1.2 Theoretical Explanations Various theoretical explanations have been put forward to explain why cognitive ability and risk aversion might be negatively related. One prominent explanation based on dual process theory (Evans & Stanovich, 2013; Kahneman & Frederick, 2002; Loewenstein & O’Donoghue, 2004) is that people with high cognitive ability are more reflective and, thus, less likely to make judgement and decision errors (Benjamin et al., 2013). According to dual-pr (...truncated)