Pop Quiz Time
An assistant professor at the Massachusetts Institute of Technology, has developed a 90-second test that seems to predict whether you will be good at things like managing money. The test consists of the following three questions.
(1) A bat and a ball cost $1.10 in total. The bat costs $1 more than the ball. How much does the ball cost?
(2) If it takes five machines five minutes to make five widgets, how long would it take 100 machines to make 100 widgets?
(3) In a lake, there is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half the lake?
Answers can be found at the end of this post.
Each question has an intuitive - and wrong - response. Most people need a moment's reflection to get the right answer. Thus, the questions test a certain type of intelligence - "cognitive reflection."
Besides being fun, the cognitive reflection test (CRT) has an amazing correlation with people's ability to evaluate risky propositions and to sort out the time value of money. (A dollar today is worth more than a dollar in the future because today's dollar earns interest.)
Respondents were also asked to choose between various pairs of economic alternatives. Many of the decisions involved temporal choices. For instance, would you rather receive $3,400 this month or $3.800 next month?
The second choice is better: it's equivalent to getting 12 percent interest in just a month. Of the people who scored a perfect 3 on the CRT, 60 percent preferred to wait a month. Of the people who got zero on the CRT, only 35 percent did.
People with high scores also showed more tolerance for risk when the odds were in their favor. For instance, people were asked which they would prefer: (a) $500 for sure, or (b) a gamble in which they had a 15 percent chance of winning $1 million and an 85 percent chance of receiving nothing.
Of people who scored zero on the CRT, the overwhelming majority took the sure $500. Of people who got a perfect 3, 60 percent preferred to roll the dice. Intuitively, they understood the concept of the gamble's "expected value," which is the sum of possible values, each multiplied by its probability (15 percent of $1 million plus 85 percent of zero equals $150,000). Clearly, this beats $500. Indeed, it's interesting how few people were willing to take the risk.
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Correct answers are (1) 5 cents; (2) 5 minutes; and (3) 47 days.
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(1) A bat and a ball cost $1.10 in total. The bat costs $1 more than the ball. How much does the ball cost?
(2) If it takes five machines five minutes to make five widgets, how long would it take 100 machines to make 100 widgets?
(3) In a lake, there is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half the lake?
Answers can be found at the end of this post.
Each question has an intuitive - and wrong - response. Most people need a moment's reflection to get the right answer. Thus, the questions test a certain type of intelligence - "cognitive reflection."
Besides being fun, the cognitive reflection test (CRT) has an amazing correlation with people's ability to evaluate risky propositions and to sort out the time value of money. (A dollar today is worth more than a dollar in the future because today's dollar earns interest.)
Respondents were also asked to choose between various pairs of economic alternatives. Many of the decisions involved temporal choices. For instance, would you rather receive $3,400 this month or $3.800 next month?
The second choice is better: it's equivalent to getting 12 percent interest in just a month. Of the people who scored a perfect 3 on the CRT, 60 percent preferred to wait a month. Of the people who got zero on the CRT, only 35 percent did.
People with high scores also showed more tolerance for risk when the odds were in their favor. For instance, people were asked which they would prefer: (a) $500 for sure, or (b) a gamble in which they had a 15 percent chance of winning $1 million and an 85 percent chance of receiving nothing.
Of people who scored zero on the CRT, the overwhelming majority took the sure $500. Of people who got a perfect 3, 60 percent preferred to roll the dice. Intuitively, they understood the concept of the gamble's "expected value," which is the sum of possible values, each multiplied by its probability (15 percent of $1 million plus 85 percent of zero equals $150,000). Clearly, this beats $500. Indeed, it's interesting how few people were willing to take the risk.
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Correct answers are (1) 5 cents; (2) 5 minutes; and (3) 47 days.
* * * * *
posted by Bob Moser at
6:28 PM
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