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

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.