Smart people act more rationally in economics

Share on FacebookShare on Google+Email this to someoneTweet about this on Twitter

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….

Labels: ,

20 Comments

  1. It is rotten writing to keep referring to “better CS” when you mean “higher CS”; only at the end does he get it right. Whether it is better, and by what criteria, is what he was investigating; that it was higher is what he knew.

  2. if it has multiple authors listed perhaps you’re seeing variation in editorship of the primary author by the others.

  3. That’s part of a general trend bioIgnoramus. Somewhere along the line intelligence became the more PC “cognitive ability”, and now it seems the odious “cognitive skills”. One wonders if they will start calling favored personality traits “personal skills”. Such nonsense.

  4. the semantic arms race is part of the nature of the beast.

  5. the semantic arms race is part of the nature of the beast. 
     
    Yep. If two and two making five were part of proper political orthodoxy, simply proving that two and two make four would be next to useless. One must know how to convince people of that fact, which often means attacking the orthodoxy indirectly. 
     
    I have butted up against this very basic reality countless times in getting into contentious but useless arguments that only managed to show that I was an asocial philistine.

  6. The industrial revolution was the culmination of many things – among them, cognitive skills. However, no matter how ‘smart’ some inventors may have been, without financiers (were they ‘smart’ too?) and agreeable governments, the industrial revolution would not have happened as we know it.

  7. 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…. 
     
    I don’t agree with this claim at all. They do no math to show that independent selection on these traits would be somehow impossible, just assert that it’s hard to imagine. I don’t see why these traits couldn’t be genetically independent (in principle) while still being correlated in the populations we observe, just because of the genetic history. 
    I’m particularly curious about general cognitive ability and time preference. One commonly advanced argument is that higher intelligence allows for a better internal model of future rewards, so that it results fairly directly in more deferred gratification. However, observing both Lord Byron and squirrels (along with many points between), we can see that this can’t be the whole story; and I would argue that there seems to exist some neurochemical mechanism that rewards the act of deferral, of hoarding and miserliness, in and of itself, independent of any vision of future benefit. And just because our history makes the strength of this mechanism correlate fairly well with overall cognitive ability, it doesn’t follow that the two are really intrinsically bound…

  8. Gregory Clark: 
     
    “When I set out in my PhD thesis to try and explain differences in income internationally in 1910 I found that asking simple questions like “Why could Indian textile mills not make much profit even though they were in a free trade association with England which had wages five times as high?” led to completely unexpected conclusions. You could show that the standard institutional explanation made no sense when you assembled detailed evidence from trade journals, factory reports, and the accounts of observers. Instead it was the puzzling behavior of the workers inside the factories that was the key.” 
     
    You know, I think that historical and cultural variables play a larger role than Gregory Clark believes. Remember, the Indian mill workers were not as productive as the English mill workers when they lived in India. When the Indian mill workers immigrated to the UK in the 1950s though, they were able to raise their productivity to the same level as the white Englishmen and attain a similar level of economic success. Their descendants have gone on to achieve slightly more economic success, and significantly more academic success, than the native English population. 
     
    What changed for the Indian mill workers? I think asking this question would give us a chance to identify critical non-genetic factors that can promote or retard the utilization of human capital.

  9. @McGraw: 
     
    I have one possible answer to your question in my recent paper “The O-Ring Sector and the Foolproof Sector: An explanation for cross-country income differences.” Link in my name.  
     
    The basic story is that the highest level of technology a country can employ is pinned down by the skill of its best workers, who work in the “O-Ring” sector. But there are some other “Foolproof” jobs within every country that can be done by any kind of worker.  
     
    Because the best workers can switch between the “O-Ring” jobs and the “Foolproof” jobs, skilled workers must earn the same wage in both sectors. But less-skilled workers can take those “Foolproof” jobs for just a little less money than the skilled guys, if they’re in the same country. So the less-skilled guy, who would be effectively unemployable in that country’s high-tech sector, can still earn quite a good living if he’s in the same country as a lot of high-skilled workers: He just does the Foolproof work.  
     
    But: If those slightly-less-skilled workers tried to form their own country, they’d only be able to use some crummy technology in their new country’s “O-ring” sector (making calculator chips, not Pentiums), so their wage is vastly lower in both the O-ring sector and the Foolproof sector. [Note: I assume that worker skill has strategic complementarities in the O-ring sector, but not in the Foolproof sector: That drives everything.]  
     
    Upshot: If my model is roughly right, then bringing low-skilled workers into a high-skilled country is great news for high-skilled workers and even better news for low-skilled workers.  
     
    More details in the paper, of course, and I hope a lot of people kick the tires on this model. It builds on some big ideas from Michael Kremer and Charles Jones.

  10. “What changed for the Indian mill workers? I think asking this question would give us a chance to identify critical non-genetic factors that can promote or retard the utilization of human capital.” 
     
    What makes you think the difference between the immigrants and the natives were non-genetic? Do you really think that the people that moved to England in the 50s were a random sample of the Indian population?

  11. McGraw makes an interesting point, but surely the emigrants to the UK were no random sample of Indian workers. 
     
    Henry

  12. I haven’t researched this, but if we are talking about textile mills I think the immigrants to the north of England textile mills were mainly from Pakistan.

  13. Garrett:  
     
    Your model is basically comparative advantage in one country. It fails because it does not recognize that low skill workers bring accompanying externalities — such as high crime and agitation for socialism.  
     
    Low skill workers will not be content to work in “Foolproof” factories unto the nth generation. They want the money of the O-ringers and they want it now. And they have votes, so they will be pandered to.

  14. For some people, the entire world is a Rorschach inkblot test…

  15. @Henry and Jayson: 
     
    Economists have looked into the question of whether emigrants are different from the rest of the countrymen they leave behind.  
     
    From Lutz Hendricks’s heavily-cited AER piece (link in “Homepage”):  
     
    “The most direct evidence against the hypothesis of strong self-selection comes from studies 
    that follow individual workers across borders.” 
     
    He then marches through a variety of studies. I made heavy use of Hendricks’s work in my Economic Inquiry piece, “IQ in the production function: Evidence from immigrant earnings.” His work is well worth reading.  
     
    In my work, I found that immigrants from low-IQ countries earn a bit less than immigrants from high-IQ countries, but the effect is small–just what you’d expect from the IQ/Wage literature, including Murray & Herrnstein’s results.  
     
    Stylized fact: 1 IQ point causes about 1% higher wages, on average. Tiny compared to cross-country productivity differences of 3,000% or so.  
     
    Cognitive skills like IQ seem to be a big deal for countries, but a small deal for individuals–so there are likely to be massive IQ externalities. Tracking those down–and pulling them out of the world of hand-waving and into the world of science—is a big part of my research. Hope others join in….

  16. @adsf: 
     
    I address some of the political and social issues you mention in my JEBO paper “Are smarter groups more cooperative? Evidence from Prisoner’s Dilemma Experiments.” After doing a meta-study of cooperation games at high- and low-SAT universities, I contend that smarter groups build better political institutions and take a longer time horizon into account.  
     
    My GMU colleague Bryan Caplan and his coauthor Stephen Miller were the first to clearly show that high-IQ people are more likely to support free markets in opinion polls. Relevant link under “Homepage.”  
     
    Also, in my O-Ring/Foolproof paper, increases in low-skilled immigration free up high-skilled workers so they can work in the increasing-returns O-Ring sector. That’s essentially a positive externality of low-skilled immigration, something that a careful policymaker would weigh in the balance against the possible negative externalities from crime, anti-market voting, etc. Size matters, as Deirdre McCloskey would point out.  
     
    (Note: Within the O-Ring/Foolproof model, high-skilled immigrants are better than low-skilled immigrants, ceteris paribus, but more immigrants are better than fewer immigrants from the skilled workers’ POV.)

  17. The Indian laborers in the UK were disproportionately Sikhs from the rural Punjab. Many came from the Sikh carpenter caste.

  18. Hi Garrett,  
     
    My apologies if the original message was unduly harsh. But with respect to this:  
     
    Also, in my O-Ring/Foolproof paper, increases in low-skilled immigration free up high-skilled workers so they can work in the increasing-returns O-Ring sector. That’s essentially a positive externality of low-skilled immigration, something that a careful policymaker would weigh in the balance against the possible negative externalities from crime, anti-market voting, etc. Size matters, as Deirdre McCloskey would point out.  
     
    (Note: Within the O-Ring/Foolproof model, high-skilled immigrants are better than low-skilled immigrants, ceteris paribus, but more immigrants are better than fewer immigrants from the skilled workers’ POV.) 
     
    There are a few additional points here:  
     
    1) First, I think one would be hard-pressed to show that low skilled immigrants increase productivity enough to compensate for being net tax recipients. In California alone public schools are $7000 or more per child per year; with three children we’re talking $21k or more, which is likely more than a low skilled man makes let alone pays in taxes.  
     
    Essentially the problem is that the lower the skill, the higher the tax drain *and* the lower the economic benefit (and the more the negative cultural externalities).  
     
    2) Second, there are practical limits on the number of immigrants society is likely to accept per year. Even if that number was several million, it could entirely be filled with higher skilled rather than lower skilled immigrants[1].  
     
    3) Finally, an important consideration here is the long-term effect of a low-skill labor shortage: it leads to increased automation. A surplus of low skill labor is a bad thing — like slavery or our current system of illiterate migrant workers, it is a local equilibrium that reduces the incentive for productivity-increasing robotics.  
     
    In an age of ubiquitous GPS and wireless and self-driven cars and Roombas, automatic machines for fruit picking and house cleaning are not at all out of the question. We already have them for dish washing, laundry, etc. See Japan for the leading edge here.  
     
    Thus, the model of “freeing up high skill individuals to work on O-Rings” wouldn’t hold. Far from being freed up, the high skill individuals would need to work even harder to pay for the custodial state required to take care of low skill workers. 
     
    [1] assuming for now that said high IQ immigrants can be made to assimilate, or to work for the benefit of the society they’ve migrated to. This may not necessarily happen as they would immediately rise to the commanding heights of the new system, and would shape it to *reduce* the need for cultural changes on their behalf and *increase* the changes on the part of the host population. Again, numbers are highly relevant here.

  19. Essentially the problem is that the lower the skill, the higher the tax drain *and* the lower the economic benefit (and the more the negative cultural externalities). 
     
    Not to sound too “leftist” but can’t some part of this could possibly be accounted as a support for the industries who employ low qualification workers? 
    I.e. it allows them to pay much lower wages than would be realistic in the surrounding economic conditions, you can’t have starving employees and expect a fair job done. 
     
    The “negative cultural externalities” seem much more insidious, I have just today witnessed an anecdotal example. 
    The french health care system though “socialistic” and yet more cost effective than the american one employs lots of coloured frenchies from the antilles, seemingly because they accept lower wages for menial administrative jobs. 
    Given the very low qualifications required for these jobs it is not the (putative, possible) lower skills they could have which jeopardize the work but they have “pride” and get upset at the patients and willingly screw the paper work in retaliation for “offenses”. 
    In my case it was beneficial, the cashier did not record all the costs of examinations I had incurred because he felt “overworked” by too many patients at lunch time…

  20. can’t some part of this could possibly be accounted as a support for the industries who employ low qualification workers?  
     
    Right — but that kind of subsidy is what does not benefit society. Industries which depend on slave labor and/or unskilled labor need productivity improvements and structural changes, not more slaves.

a