I.Q., Stock Picking, and Discipline

By way of Robert Shiller, we come across this interesting paper linking I.Q. and successful financial investment behavior:

Stock market participation is monotonically related to IQ, controlling for wealth, income, age, and other demographic and occupational information. The high correlation between IQ and participation exists even among the affluent. Supplemental data from siblings, studied with an instrumental variables approach and regressions that control for family effects, demonstrate that IQ’s influence on participation extends to females and does not arise from omitted familial and nonfamilial variables. High-IQ investors are more likely to hold mutual funds and larger numbers of stocks, experience lower risk, and earn higher Sharpe ratios. We discuss implications for policy and finance research.

What I found odd was Shiller’s description of the study (boldface mine):

The results are that people with high I.Q.’s build portfolios with better risk-return profiles than their lower-scoring peers.

Certainly, caution is needed here. I.Q. tests are controversial as to what they measure, and factors like income, quality of education, and family background may not be completely controlled for. But the study’s results are worth pondering for their possible implications…

Still, the results are interesting. The authors didn’t claim that people with high scores had some kind of monopoly on stock-picking genius. What they did contend was that these people tended to follow basic rules of successful investing.

In some ways, it’s a puzzle why I.Q. scores would matter in this regard. After all, the view that people should diversify their investments, to avoid putting all their eggs in one basket, is widely accepted. It’s not hard to diversify a portfolio or to have someone do it for you.

Actually, it’s not a puzzle at all. To the extent, I.Q. measures the ability to perform well on tests–and the self-discipline that entails–it’s not surprising, but expected. Leaving issues of heritability and so on (we’re not going there), it’s not entirely clear what I.Q. is measuring.

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2 Responses to I.Q., Stock Picking, and Discipline

  1. Noah Smith says:

    From the tests I’ve taken, IQ seems to measure one’s ability to perform a small set of routine mental tasks fast and accurately. The tasks include mathematical pattern recognition, basic logic, mental shape manipulation, and memorization. Then those tasks seem to be added up more or less linearly.

  2. Prof.Pedant says:

    It could also be that – to the extent that IQ tests actually measure intelligence – that people of higher intelligence are more able to understand why a diverse portfolio is usually a lower risk portfolio and consequently, or also, are able to limit the instances in which they do not follow that sound advice.

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