Does Cognitive Imprecision Result in Under-Reaction or Over-Reaction?

That is the topic of a new paper by Michael Woodford, to be presented at this year’s AEA meetings.  Here at least is the abstract:

Men who score high on standardized IQ tests display forecast errors for inflation that are 50% lower than forecast errors for other men in a representative sample of Finnish households. High-IQ men, but not others, have consistent inflation expectations over time and their inflation perceptions align with past expectations. Only high-IQ men increase their consumption propensity when expecting higher inflation in line with the consumption Euler equation. High-IQ men are also twice as sensitive to interest-rate changes when making borrowing decisions. Heterogeneity in education, income, or financial constraints do not explain these results. Limited cognitive abilities are thus human frictions to the transmission and effectiveness of economic policy and inform research on heterogeneous agents in macroeconomics and finance.

How many papers are there in economics about psychological cognitive bias as a source of error, as opposed to low IQ as a source of error?  Might that be a bias of sorts and not one of IQ?


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