How memory and attention shape risk perception
Bohren et al. in this paper examine how the way people learn about uncertainty affects their perception of it and subsequent decision-making. The authors conducted a series of experiments where participants made choices between two risky assets:
– Asset U: Outperformed in one unlikely state but underperformed in all others
– Asset F: Outperformed in most states but significantly underperformed in one state
Participants learned about the assets’ distributions in two ways:
- Simultaneous Information: Shown the full distribution of outcomes at once
- Sequential Information: Sampled outcomes one-by-one from the distribution
The experiments manipulated factors affecting attention and memory to test the proposed cognitive mechanisms.
Key findings
- Learning environment significantly impacted choices:
– Simultaneous Information: 58% chose Asset U
– Sequential Information: 85% chose Asset F - The choice gap was driven by differences in beliefs about the assets’ performance:
– Simultaneous: More optimistic about Asset U
– Sequential: More optimistic about Asset F - Manipulating attention and memory eliminated the choice gap:
– Reducing salience of Asset U’s outperformance in Simultaneous condition shifted choices to Asset F
– Reducing memory requirements in Sequential condition shifted choices to Asset U - Introducing interference in the Sequential condition by adding a decoy asset similar to Asset U reversed the preference for Asset F
- The entire 40+ percentage point gap in choices appears driven by cognitive constraints, not inherent preferences or information differences
The authors conclude that how people learn about uncertainty fundamentally shapes their mental representations and perceptions of risk, with important implications for economic decision-making and modeling.
A Cognitive Foundation for Perceiving Uncertainty
Authors: J. Aislinn Bohren, Josh Hascher, Alex Imas, Michael Ungeheuer, Martin Weber
From: University of Pennsylvania, University of Chicago, Aalto University, University of Mannheim
Cognitive reflection and economic behavior
Fossen et al. argue that “cognitive reflection, the ability to avoid intuitive but potentially wrong decisions by switching to a more analytical mindset, was associated with individual preferences and socio-economic outcomes.” In this paper, the authors present a pre-registered study to test the external validity of associations between cognitive reflection and various economic preferences and socio-economic outcomes.
Study Design and Methods
The study uses data from 2,785 participants in the German Socio-Economic Panel’s Innovation Sample (SOEP-IS), which is representative of the German population.
It tests 16 pre-registered hypotheses about relationships between Cognitive Reflection Test (CRT) scores and:
- Economic preferences (risk-taking, patience, impulsiveness, altruism, trust, reciprocity)
- Socio-economic outcomes (income, wealth, political orientation, religiousness, health, life satisfaction)
- Proxy variables for preferences (being a civil servant, saving, charitable giving, number of friends)
The analysis uses multiple regression, controlling for gender, age, and education.
[W]e show that higher cognitive reflection is associated with more saving and interpersonal trust and find suggestive evidence of a positive relationship with labor income. We do not observe any other statistically significant or suggestive associations with cognitive reflection and therefore cannot confirm previously reported findings concerning risk taking, patience, and social preferences.
Does Cognitive Reflection Relate to Preferences and Socio-Economic Outcomes?
Authors: Frank M. Fossen, Levent Neyse, Carsten Schroeder
From: University of Nevada, German Institute for Economic Research
