Bias and brains: Risk aversion and cognitive ability across real and hypothetical settings

I collect data on subjects’ risk attitudes using real and hypothetical risky choices. I also measure their cognitive ability using the cognitive reflective test (CRT). On average, measured risk preferences are not significantly different across real and hypothetical settings. However, cognitive ability is inversely related to risk aversion when choices are hypothetical, but it is unrelated when the choices are real. This interaction between cognitive ability and hypothetical setting is consistent with the notion that some individuals, specifically higher-ability individuals, may treat hypothetical choices as “puzzles,” and provides one potential explanation for why some studies find that subjects indicate that they are more tolerant of risk when they make hypothetical choices than when they make real choices. Copyright Springer Science+Business Media New York 2013