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Intelligence, Cognitive Reflection, and Decision Making

06/10/2006 10:00 AM Wong Auditorium
Shane Frederick, Shalaby and Mary Sarofim Assistant Professor, MIT Sloan School of Management

Description: Would you go for the sure bet -- say, a guaranteed $100, or a 75% chance on $200? How about receiving $3,400 this month, or waiting two months to get $3,800? People have widely varying tastes for risk, and different levels of patience. Decision researchers have known this for a while. But Shane Frederick's work puts a new spin on the subject. With a deceptively simple -cognitive reflection test (CRT),” Frederick has come up with a way of predicting individuals' predilections for risk-taking. Frederick found 3,000 plus subjects -- mostly university students across the U.S. _ to answer his three CRT questions, as well as to respond to a survey on financial gambles and other risk-based decisions. The CRT, which he describes as functioning like an IQ test, tends to elicit impulsive, erroneous answers. Here's one sample question: A bat and a ball cost $1.10 in total. The bat costs $1 more than the ball. How much does the ball cost? The intuitive answer is 10 cents. The correct answer is 5 cents. Frederick discovered striking correlations between individuals scoring correctly on all three CRT questions, and their tendency to take financial gambles. For instance, almost a third of the high scorers preferred a 1% chance at $5,000 than a guaranteed $60. He also found a connection between high scores and patience around financial outcomes. Sharp distinctions between men and women emerged from his data. 80% of high scoring men prefer a 15% chance at $1 million over a certain $500, versus 38% of high scoring women. Frederick, who describes his work on individual attitudes and differences as -the elephant in the corner for decision research,” wonders if the kind of intelligence or cognitive abilities demonstrated by his CRT play an important causal role in decision making.

About the Speaker(s): Shane Frederick's primary research interests are judgment and choice heuristics, intertemporal choice, preference elicitation procedures, the relation between IQ and decision making strategies, consumer regret, and biases in predicting the preferences of others. He has been at Sloan since 2001. Prior to that, he was a research associate and lecturer at the Woodrow Wilson School of Public & International Affairs at Princeton University. He received a Ph.D. in Decision Sciences from Carnegie Mellon University in 1999, an M.S. in Resource Management from Simon Fraser University in 1993 and a B.S. in Zoology from the University of Wisconsin in 1990.

Host(s): Sloan School of Management, MIT Sloan School of Management

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MIT World — special events and lectures

MIT World — special events and lectures

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