Cognitive Abilities and Financial Decision Making

Abstract

In this chapter, we discuss the role of cognitive abilities in financial decision making. First, we present the Cattell-Horn-Carroll theory of cognitive abilities. This umbrella taxonomy integrates two important models: Cattell-Horn’s model of fluid and crystallized intelligence and Carroll’s Three-Stratum Theory. We focus mostly on the Gf (fluid intelligence) and Gc (crystallized intelligence) and their relationships with financial decision making. Next, we briefly describe Skilled Decision Theory and we present the construct of statistical numeracy: its relationships with financial outcomes (such as personal wealth) and basic mechanisms that underlie the superior performance of people with high statistical numeracy. Moreover, we also describe the multiple numeric competencies (objective numeracy, approximate numeracy, and subjective numeracy) framework. Finally, we present current research on the development and validation of methods (such as cognitive training, education, decision aids) intended to enhance cognitive abilities or help people with lower cognitive abilities to make better financial decisions.