TY  - RPRT
        AU  - Binswanger, Johannes
AU  - Salm, Martin
        TI  - Does Everyone Use Probabilities? Intuitive and Rational Decisions about Stockholding
        PY  - 2013/Mar/
        PB  - Institute of Labor Economics (IZA)
        CY  - Bonn
        T2  - IZA Discussion Paper
        IS  - 7265
        UR  - https://www.iza.org/index.php/publications/dp7265
        AB  - We investigate the relationship between subjective probabilities of future stock market returns and decisions about stockholding. Specifically, we examine whether acting upon subjective probabilities is confined to individuals with high cognitive skills. We explore this question using data from the U.S. Health and Retirement Study (HRS). Our empirical analysis is guided by a novel and simple model based on the dual-systems framework from psychology (Kahneman, 2003). In our model, individuals with low cognitive skills make decisions in an intuitive non-probabilistic way based on cues and feelings. Individuals with high cognitive skills make decisions akin to the expected utility model.
As predicted by our model, in our empirical analysis we find that there is a significantly stronger association between subjective return probabilities and stockholding decisions for individuals with high cognitive skills, compared to individuals with lower cognitive skills. The paper contributes to a better understanding of the role of cognitive skills in decision making under uncertainty.
        KW  - subjective expectations
KW  - probabilities
KW  - dual system decision making
KW  - cognitive skills
KW  - cognitive economics
        ER  -