IQ, Expectations, and Choice.

This article investigates the relationship between cognitive abilities (measured by IQ), the formation and updating of inflation expectations, and consumption plans within a representative male population in Finland. Using linked administrative data on cognitive test scores from the Finnish Defence Forces and survey data on inflation forecasts and consumption intentions, the study finds that high-IQ men make significantly smaller inflation forecast errors, hold more consistent expectations over time, and adjust their consumption plans in response to inflation expectations in line with economic theory, unlike low-IQ men. These differences persist even after controlling for education, income, and socio-economic status, and are not fully explained by existing macroeconomic models incorporating bounded rationality. Additional survey experiments reveal that low-IQ individuals have less understanding of inflation concepts, poorer ability to forecast mean-reverting processes, and difficulty mapping economic beliefs into optimal consumption choices, whereas high-IQ individuals better approximate theoretical decision-making. The findings suggest that cognitive abilities influence both subjective macroeconomic beliefs and economic behavior, highlighting the need for macroeconomic models to incorporate heterogeneous cognition and for policy designs that consider cognitive diversity in the population.