121 Probability Weighting and Cognitive Ability
- Syngjoo Choi, Jeongbin Kim, Eungik Lee, and Jungmin Lee
- 121 Syngjoo Choi 2.pdf
Abstract
Probability weighting is a major concept for accommodating systemic departures from expected utility theory. We examine the relation between probability weighting and cognitive ability by conducting laboratory experiments with a pool of subjects with unusually large variation in cognitive ability; native-born South Koreans and North Korean refugees. We find that cognitive ability is related to two distinct features of probability weighting-likelihood insensitivity and optimism. Particularly, the negative association between likelihood insensitivity and cognitive ability is robust to potential confounders and stronger among lower cognitive-ability subjects. Our findings shed light on the sources of anomalous choices against expected utility theory.
Keywords: probability weighting, cognitive ability, likelihood insensitivity, North Korean refugees
JEL classification: C91; D01; D81; D91