Cognitive skills affect economic preferences, strategic behavior, and job attachment

A very interesting paper here:

Economic analysis has so far said little about how an individual's cognitive skills (CS) are related to the individual's economic preferences in different choice domains, such as risk taking or saving, and how preferences in different domains are related to each other. Using a sample of 1,000 trainee truckers we report three findings. First, there is a strong and significant relationship between an individual's CS and preferences. Individuals with better CS are more patient, in both short- and long-run. Better CS are also associated with a greater willingness to take calculated risks. Second, CS predict social awareness and choices in a sequential Prisoner's Dilemma game. Subjects with better CS more accurately forecast others' behavior and differentiate their behavior as a second mover more strongly depending on the first-mover's choice. Third, CS, and in particular, the ability to plan, strongly predict perseverance on the job in a setting with a substantial financial penalty for early exit. Consistent with CS being a common factor in all of these preferences and behaviors, we find a strong pattern of correlation among them. These results, taken together with the theoretical explanation we offer for the relationships we find, suggest that higher CS systematically affect preferences and choices in ways that favor economic success.

When do we cheat?

Another truly interesting study by Dan Ariely: The Effect of One Bad Apple on the Barrel

He also gave a talk about it on TED recently.

Genetic Determinants of Financial Risk Taking

This is a cool find:

For the first time, Kuhnen and Chiao (2009) examined the influence of genes that regulate dopamine and serotonin neurotransmission on risk-taking in financial investment decisions. The exciting result is that people with the short serotonin transporter gene, 5-HTTLPR (two copies of the short allele), relative to those with the long version of that polymorphism (at least one copy of the long allele), invested 28% less in a risky investment. And people who carry the 7-repeat allele of the DRD4 gene in the dopamine family, relative to those carrying other versions of that gene, invested about 25% more in a risky investment.

How much do you like ice cream?

When answering this simple question "How much do you like ice cream?", what is exactly going on in people's mind? Here are my speculations:

1. They search in their memories of eating ice cream and compute an average of all experiences.
2. They only focus on the most recent 5 experiences of having ice cream and average.
3. They focus on the most pleasant experience.
4. They combine the most pleasant experience with the most recent experience.
5. They think of a prototypical ice cream and estimate how much they will like it.
6. They think about the future and ask themselves how likely they will have ice cream and how much they will enjoy it.

There might be more possibilities. Now, the real difficult question is: are people doing one of the above or a combination of the calculations?

Does value depend on the probability of acquisition?

Endowment effect shows that people tend to overvalue the things they own, that they demand much more to give up an object than they would be willing to pay to acquire it (WTA > WTP). Perhaps there's more one twist. When giving up an object, people may also estimate the ease with which they acquired the object in the first place and calculate its value accordingly. Ease in this case does not mean mental or physical effort, but probability.

So for example imagine these two groups:

Group 1: a $10 mug was acquired with a probability of 100% (e.g. given as a gift)
Group 2: a $10 mug was acquired with a probability of 20% (e.g. won it in a gamble)

When selling their mug, which group will sell it for more? Of course Group 2. So I would expect a monotonically decreasing curve for value (or WTA) as a function of the probability of acquisition.