“Influence of Behavioral Biases on Cognitive Abilities”

Abstract

The study aimed toanalyzethe role of individual’s level of cognitive abilities in making financial decisions and whether these abilities are affected by their behavioral biases. Cognitive reflection test (Fredrick, 2005) was used to investigate that whether behavioral biases that play major role in financial decisions are relatedwith cognitive abilities. The research found that individuals who scored high on CRT are less likely to overconfidence, conjunction fallacy and conservatism biases. The research also related CRT with subjects such as time preferences and risk preferences and found that high score group are more patient and more risk seeker in domain of gain and less risk seeker in domain of losses. However behavioral biases are lower for people having higher cognitive abilities but they are still present in financial decisions.