Deck 6: Types of Intelligence and Investment Performance; Impaired Cognitive Function and Diminished Decision Making

Question 1

What are the three different measures of intelligence?

Answer 1

Intelligence quotient (IQ) is a measure of fluid intelligence that measures reasoning ability. Cognitive reflection is the tendency to use an analytical mode of thinking rather than an intuitive mode. The theory of mind refers to a person's ability to infer the intentions of others.

Question 2

How does fluid intelligence impact financial decisions?

Answer 2

Higher IQ is related to:
• Higher stock market participation
• Higher portfolio returns
• Less investment biases
• Choosing lower fee mutual funds
• More accurate inflation forecasts
• Less risk aversion

Question 3

How does cognitive reflection relate to financial decisions?

Answer 3

Analytical thought is deliberate and takes effort, while the intuitive mode of thinking is spontaneous and effortless. Since intuitive thinking uses more heuristics than the analytical thinking mode, it is more susceptible to the influence of psychological biases. Specific biases tested are the base rate fallacy, conservatism bias, choice framing, and others. Analytical investors tend to be less risk averse and more patient.

Question 4

What is the relationship between the theory of mind and investment decisions?

Question 5

What is cognitive aging?

Question 6

How do financial knowledge and cognitive ability interact over time?

Question 7

How is cognitive aging associated with financial fraud?

Question 8

How is cognitive aging related to financial decisions?