IQ, Expectations, and Choice

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Title: IQ, Expectations, and Choice
Author: D'Acunto, Francesco ; Hoang, Daniel ; Paloviita, Maritta ; Weber, Michael
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
Series number: 2/2019
Year of publication: 2019
Publication date: 18.1.2019
Published in: Revised version uploaded 30 September 2019.
Pages: 44
Subject (yso): odotukset; kyvykkyys; inflaatio; käyttäytyminen; valinta; kulutus; kognitiiviset taidot; kotitaloudet
Keywords: inflaatio-odotukset;
JEL: D12; D84; D91; E21; E31; E32; E52; E65
Other keywords: Behavioral Macroeconomics; Heterogeneous Beliefs; Limited Cognition; Expectations Formation; Household Finance
Abstract: We use administrative and survey-based micro data to study the relationship between cognitive abilities (IQ), the formation of economic expectations, and the choices of a representative male population. Men above the median IQ (high-IQ men) display 50% lower forecast errors for inflation than other men. The inflation expectations and perceptions of high-IQ men, but not others, are positively correlated over time. High-IQ men are also less likely to round and to forecast implausible values. In terms of choice, only high-IQ men increase their propensity to consume when expecting higher inflation as the consumer Euler equation prescribes. High-IQ men are also forward-looking - they are more likely to save for retirement conditional on saving. Education levels, income, socio-economic status, and employment status, although important, do not explain the variation in expectations and choice by IQ. Our results have implications for heterogeneous-beliefs models of household consumption, saving, and investment.

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