IQ, Expectations, and Choice

Francesco D’Acunto, Daniel Hoang, Maritta Paloviita () and Michael Weber

No 25496, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Forecast errors for inflation decline monotonically with both verbal and quantitative IQ in a large and representative male population. Within individuals, inflation expectations and perceptions are autocorrelated only for men above the median by IQ (high-IQ men). High-IQ men's forecast revisions are consistent with the diagnostic-expectations framework, whereas anything goes for low-IQ men. Education levels, income, socioeconomic status, or financial constraints do not explain these results. Using ad-hoc tasks in a controlled environment, we investigate the channels behind these results. Low-IQ individuals' knowledge of the concept of inflation is low; they associate inflation with concrete goods and services instead of abstract economic concepts, and are less capable of forecasting mean-reverting processes. Differences in expectations formation by IQ feed into choice—only high-IQ men plan to spend more when expecting higher inflation as the consumer Euler equation prescribes. Our results have implications for heterogeneous-beliefs models of consumption, saving, and investment.

JEL-codes: D12 D84 D91 E21 E31 E52 E65 E7 (search for similar items in EconPapers)
Date: 2019-01
New Economics Papers: this item is included in nep-mac
Note: AG AP CF ED EFG LS ME
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Citations: View citations in EconPapers (30)

Published as Francesco D’Acunto & Daniel Hoang & Maritta Paloviita & Michael Weber, 2023. "IQ, Expectations, and Choice," The Review of Economic Studies, vol 90(5), pages 2292-2325.

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Journal Article: IQ, Expectations, and Choice (2023)
Working Paper: IQ, Expectations, and Choice (2019)
Working Paper: IQ, expectations, and choice (2019)
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