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IQ, expectations, and choice

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

No 127, Working Paper Series in Economics from Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering

Abstract: We use administrative and survey-based micro data to study the relationship between cognitive abilities (IQ), the formation of economic expectations, and the choices of a representative male population. Men above the median IQ (high-IQ men) display 50% lower forecast errors for inflation than other men. The inflation expectations and perceptions of high-IQ men, but not others, are positively correlated over time. High-IQ men are also less likely to round and to forecast implausible values. In terms of choice, only high-IQ men increase their propensity to consume when expecting higher inflation as the consumer Euler equation prescribes. High-IQ men are also forward-looking - they are more likely to save for retirement conditional on saving. Education levels, income, socio-economic status, and employment status, although important, do not explain the variation in expectations and choice by IQ. Our results have implications for heterogeneous-beliefs models of household consumption, saving, and investment.

Keywords: Behavioral Macroeconomics; Heterogeneous Beliefs; Limited Cognition; Expectations Formation; Household Finance (search for similar items in EconPapers)
JEL-codes: D12 D84 D91 E21 E31 E32 E52 E65 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2019
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Working Paper: IQ, Expectations, and Choice (2019) Downloads
Working Paper: IQ, Expectations, and Choice (2019) Downloads
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