Friday, April 24, 2009

Smart people act more rationally in economics   posted by Razib @ 4/24/2009 11:04:00 PM

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

From the discussion:
The novel relationships we find have potentially deep implications. For example, Gregory Clark recently suggested that the initial location of the industrial revolution in England may have been due to a "survival of the richest" selection process, that operated there from as early as 1250 C.E...This selection may have been cultural, genetic, or both. He suggests that selection favored "capitalist" traits that include several of the ones (e.g. risk taking and saving propensity) we analyze herein. Were these traits independent, it is hard to imagine how a selection process could induce such a bundled concentration in the time frame suggested. But if these traits are correlated due to their linkage with cognitive skills, then a "selection of the richest" explanation, operating through selection for cognitive skills, becomes more plausible....

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