Research / BFI Working PaperSep 10, 2019

IQ, Expectations, and Choice

Francesco D'Acunto, Daniel Hoang, Maritta Paloviita, Michael Weber

Forecast errors for inflation decline monotonically with both verbal and quantitative IQ in a large and representative male population. Within individuals, inflation expectations and perceptions are autocorrelated only for men above the median by IQ (high-IQ men). High-IQ men’s forecast revisions are consistent with the diagnostic-expectations framework, whereas anything goes for low-IQ men. Education levels, income, socioeconomic status, or financial constraints do not explain these results. Using ad-hoc tasks in a controlled environment, we investigate the channels behind these results. Low-IQ individuals’ knowledge of the concept of inflation is low; they associate inflation with concrete goods and services instead of abstract economic concepts, and are less capable of forecasting mean-reverting processes. Differences in expectations formation by IQ feed into choice—only high-IQ men plan to spend more when expecting higher inflation as the consumer Euler equation prescribes. Our results have implications for heterogeneous-beliefs models of consumption, saving, and investment.

More Research From These Scholars

BFI Working Paper Nov 9, 2017

The Information Content of Dividends: Safer Profits, Not Higher Profits

Michael Weber, Roni Michaely, Stefano Rossi
Topics:  Fiscal Studies
BFI Working Paper Aug 1, 2016

The Effect of Unconventional Fiscal Policy on Consumption Expenditure

Michael Weber, Daniel Hoang, Francesco D'Acunto
Topics:  Fiscal Studies
BFI Working Paper Nov 17, 2019

Estimating the Anomaly Base Rate

Alex Chinco, Andreas Neuhierl, Michael Weber
Topics:  Uncategorized