Are Smarter People Better Decision Makers? - The Relation Between Cognitive Ability and Risk Attitude

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School of Business | Bachelor's thesis
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Date

2025

Department

Taloustieteen laitos

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Mcode

Degree programme

Taloustiede

Language

en

Pages

27

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Abstract

This literature review looks at the relationship between cognitive ability and risk attitude and the potential underlying mechanisms that drive it. I specifically focus on biases that lead individuals to diverge from completely rational decision-making as determined by Expected Utility Theory (EUT) and use Prospect Theory (PT) to understand these biases. The four separate papers I review in this thesis support a positive correlation between cognitive ability and risk taking, particularly in scenarios involving gains. However, the causal mechanism explaining this link remains unclear, highlighting the need for further research to distinguish between influences like bias or differing utility function curvatures. This thesis will also briefly consider how rationality itself is defined within these papers drawing primarily from EUT but also looking at alternative perspectives.

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Thesis advisor

Terviö, Marko

Keywords

risk attitude, risk aversion, cognitive ability, prospect theory, expected utility theory, rationality

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https://urn.fi/URN:NBN:fi:aalto-202505254025

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