Cognitive Ability and Economic Decision Making - A study comparing cognitive reflection and intelligence quotient in decision time in various economic situations

Abstract: Cognitive ability can be measured with several different instruments. The first thing that springs to mind is probably IQ or knowledge tests, such as the SAT. In 2005, a new test came out on the market, the cognitive reflection test (CRT). This test was constructed differently, namely to capture cognitive reflection, an ability to use system 2 in an effective way. System 2 is a concept from the dual-process theory, which states that our mind is processed with two main systems, system 1 and 2. System 1 is always active, and can be described as our intuitive system. However, when more difficult tasks need to be dealt with, system 2 needs to be activated. It is more complex, and also slower, than system 1. System 2 is deliberate, and thus, more often generates proper results, while system 1, sometimes can be sloppy. A high score on the CRT is assumed to be related to an active system 2, as the questions are constructed to generate an intuitive but incorrect answer. This study aims to examine whether there is a difference between an ordinary IQ measure and the CRT. We examine four different situations in the field of behavioural economics; decision making between lotteries (with and without losses), the public good game and the dictator game. We purpose to clarify and summarize the effects, as well as differences in effect, for CR and IQ in general, and fill out the gaps where previous research is scarce. This seems to be especially relevant for the decision time analysis, seeing that the CRT is a fairly young measure, in contrast to traditional IQ measures. Hence, our main focus is to examine the differences in decision times from these games, and whether these differences, in turn, are related to better answers and outcomes. The results we obtain do confirm that individuals with high CR have a slower decision speed for some tasks. It also confirms that these individuals make more rational and utility maximizing choices, even more so, than individuals with high IQ. We also found that CR can be a better predictor of behaviour in certain situations. Basically, we can confirm that there exists a difference between these measures, and thus, that they do capture different dimensions of cognitive ability.