Cognition and Wealth: The Importance of Probabilistic Thinking
dc.contributor.author | Lillard, Lee | |
dc.contributor.author | Willis, Robert J. | |
dc.date.accessioned | 2007-04-26T15:47:34Z | |
dc.date.available | 2007-04-26T15:47:34Z | |
dc.date.issued | 2001-06 | |
dc.identifier.uri | https://hdl.handle.net/2027.42/50613 | |
dc.description.abstract | This paper utilizes a large set of subjective probability questions from the Health and Retirement Survey to construct an index measuring the precision of probabilistic beliefs (PPB) and relates this index to household choices about the riskiness of their portfolios and the rate of growth of their net worth. A theory of uncertainty aversion based on repeated sampling is proposed that resolves the Ellsberg Paradox within a conventional expected utility model. In this theory, uncertainty aversion is implied by risk aversion. This theory is then used to propose a link between an individual’s degree of uncertainty and his propensity to give "focal" answers of "0", "50_50" or "100" or "exact" answers to survey questions and the validity of this interpretation is tested empirically. Finally, an index of the precision of probabilistic thinking is constructed by calculating the fraction of probability questions to which each HRS respondent gives a non-focal answer. This index is shown to have a statistically and economically significant positive effect on the fraction of risky assets in household portfolios and on the rate of growth of these assets longitudinally. These results suggest that there is systematic variation in the competence of individuals to manage investment accounts that should be considered in designing policies to create individual retirement accounts in the Social Security system. | en |
dc.description.sponsorship | Social Security Administration | en |
dc.format.extent | 1194418 bytes | |
dc.format.mimetype | application/pdf | |
dc.language.iso | en_US | en |
dc.publisher | Michigan Retirement Research Center, University of Michigan, P.O. Box 1248, Ann Arbor, MI 48104 | en |
dc.relation.ispartofseries | WP 2001-007 | en |
dc.title | Cognition and Wealth: The Importance of Probabilistic Thinking | en |
dc.type | Working Paper | en |
dc.subject.hlbsecondlevel | Population and Demography | |
dc.subject.hlbtoplevel | Social Sciences | |
dc.contributor.affiliationum | MRRC | en |
dc.contributor.affiliationumcampus | Ann Arbor | en |
dc.description.bitstreamurl | http://deepblue.lib.umich.edu/bitstream/2027.42/50613/1/wp007.pdf | en_US |
dc.owningcollname | Retirement and Disability Research Center, Michigan (MRDRC) |
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