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Intelligent People Are More Patient In Financial Matters And More Tolerant Of Risk

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Source: University of Bonn
Date: July 5, 2007

Assuming someone gave you the choice of 100 euros today or 150 euros in a year’s time. Which sum would you take? Scientists at the University of Bonn and the Institute for the Study of Labour (Institut zur Zukunft der Arbeit, IZA) asked 1000 adults in Germany this question. At the same time they measured the cognitive abilities of the participants, using two different methods. The result was that intelligent people prefer to wait for a higher return, rather than going for the money now. This is the first time that this relationship between intelligence and patience in financial matters has been shown. Furthermore, the willingness to run risks increases with higher intelligence.

Scientists gave the test subjects 100 euros. The participants could put this amount straight into their pockets. However, they could also invest it for a year at a guaranteed fixed rate of interest. In this way the 100 euros would become, for example, 105, 120 or 150 euros. In an experiment the candidates were supposed to decide what the minimum amount would have to be in a year’s time for it to be worth waiting longer for. The idea behind this was that the more impatient someone is in waiting for payment, the higher the incentive required must be in order for them to accept the 12-month waiting period. Using a similar experiment the scientists ascertained the willingness of the candidates to run risks. Apart from that the test persons completed two different intelligence tests. “The more intelligent the test subjects were, the more patient and tolerant of risk they were,” is how the Bonn Professor of Economics, Dr. Armin Falk, sums the results up.

But is there really a direct relationship between cognitive abilities and certain personality traits? Or is the relation more complicated? It would also be conceivable that people with a low IQ earn less money and tend to choose the 100 euros because of financial worries. In conjunction with his colleagues Dr. Thomas Dohmen, Dr. Uwe Sunde and Dr. David Huffman at the IZA, Professor Falk was able to prove that the link between patience and cognitive abilities is even valid if the income factor is taken into account. “What’s more, according to our analysis, other indirect factors of influence can be excluded as an explanation,” Professor Falk emphasises.

Intelligent people are rewarded twice over

Instead, intelligence, patience and risk tolerance seem to be closely interconnected — and probably for a good reason. In order to be able to assess a risk correctly or to have a successful strategy in the long term, it is necessary to be able to recognise how things are interconnected. “Anyone who does not have this ability may be better advised to follow the principle of ‘A bird in the hand is worth two in the bush,'” Professor Falk says.

However, someone who is intelligent seems to be twice favoured, according to the results of the Bonn study. On the one hand, they can be more successful, due to their cognitive abilities, than their less intelligent contemporaries. On the other hand, they are generally more tolerant of risk and more patient — two character traits which research shows contribute additionally to success at the workplace.

The original article can be found on the internet at: http://ftp.iza.org/dp2735.pdf

Are Risk Aversion and Impatience Related to Cognitive Ability? Thomas Dohmen, IZA; Armin Falk, IZA, University of Bonn and CEPR; David Huffman, IZA; Uwe Sunde, IZA, University of Bonn and CEPR 

Is the way that people make risky choices, or tradeoffs over time, related to cognitive ability?This paper investigates whether there is a link between cognitive ability, risk aversion, and impatience, using a representative sample of the population and incentive compatible measures. We conduct choice experiments measuring risk aversion, and impatience over anannual time horizon, for a randomly drawn sample of roughly 1,000 German adults. Subjects also take part in two different tests of cognitive ability, which correspond to sub-modules ofone of the most widely used IQ tests. Interviews are conducted in subjects’ own homes. We find that lower cognitive ability is associated with greater risk aversion, and more pronounced impatience. These relationships are significant, and robust to controlling for personal characteristics, educational attainment, income, and measures of credit constraints. We perform a series of additional robustness checks, which help rule out other possible confounds.

Written by huehueteotl

July 6, 2007 at 10:17 am

Posted in Psychology

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