If You’re So Dumb, Why Aren’t You Rich? Part II

About a year ago I cited a study showing the weak — okay, nonexistent — connection between wealth and intelligence. Here is the key chart from that study:

Just this week, however,  I ran across a new, related study, one that comes to a different conclusion (sort of). The gist: In studying the trading performance of Finns (I know, I know) who had taken mandatory IQ tests the researchers found that higher IQ traders were better than lower IQ traders. In other words, smart people are better traders. Heresy!

Okay, okay — there are lots of ways to become wealthy other than trading stocks, and trading stocks  isn’t even a very good way to generate wealth, so this isn’t a refutation, per se, of last year’s result. But that said, my experience in the markets is that while there are many, many smart people, some of the people who struggle the most are high-IQ sorts, with a tendency to over-think trading decisions.

(Speaking of which, there is a great book on this subject called Why Smart People Make Big Money Mistakes. Definitely read it, if you haven’t already.)

Food for thought, and here’s the study’s abstract:

Abstract:
This study analyzes the role that innate intelligence plays in investors‘ behavior and equity trading performance. Equity trading data are combined with data from an intelligence test administered to every Finnish male in the mandatory military service. We document two channels through which intelligence affects equity trading performance: high IQ investors exhibit superior stock-picking skills relative to low IQ investors and low IQ investors display poor trade execution: they pay too much for immediacy and poorly monitor their limit orders which generates excessive adverse selection costs. Innate intelligence remains a significant determinant of behavior and performance even after controlling for investors‘ trading activity.

Related posts:

  1. If You’re So Dumb, Why Aren’t You Rich?
  2. Active Investors are Silly People, Part XXXIV in a Series
  3. Do You Have to be Rich to be an Entrepreneur?
  4. Business Professor & Dumb Clods
  5. John Griffin, Jeffrey Harris, and

Comments

  1. Parand says:

    A friend of mine who used to write and implement trading strategies for a boutique firm tells me the most successful trader at that firm was a “used car salesman type” who went strictly on gut and made no pretense of deep analysis. Apparently this used to really upset the guys who spent all day running the numbers…

  2. John Forman says:

    I guess it makes sense that bright folks would tend to learn more quickly from their mistakes. That could very easily result in better performance over time.

  3. dug says:

    Cuts both ways. You can learn very rapidly and potentially use broader understanding to find signposts in new and unfamiliar territory, but you can also use intelligence to create nearly infinite layers of rationalization for some phenomenally stupid actions and fall into the ego trap of thinking you are smarter than the markets. Add in the group think of similarly bright people working together and you get — a hedge fund. :-?

  4. Frymaster says:

    I dunno. While these two datasets have some features in common, they really measure two different things.
    The earlier study just proves the point that building net worth isn’t about how much money you make, it’s about how much money you keep.
    The second study says that smart people are better at synthesizing complex, real-time data and making the better call. So make more money.
    Now are those people smart enough not to take that money and buy a ridiculously overpriced McMansion?

  5. Vijay Veerachandran says:

    I become dumb by skipping your reading suggestion. :-) Let us see whether it get some more wealth.

  6. jay says:

    So let’s emphasize the “innate” part in “innate intelligence” and make a distinction between the “used car salesman type” guy and the MIT quant. I know a lot of dumb smart people and a lot of smart dumb people. Given the nature of trading and the individual personalities that constitute a given makret, who would I bet on? Okay, maybe I’m a wee bit of a contrarian…but it is still a risky bet.

  7. yo says:

    I’d bet on the guy that is the street smart kind of guy, quick thinking, and has guts.

  8. Mike says:

    Seems to me the best traders are those with a high EQ – emotional quotient – rather than people with a high IQ.
    Some of the dumber people – in the sense lacking commonsense – I have come across have very high IQs.
    They are too clever for themselves by far and always creating convoluted trading hypotheses

  9. Frymaster says:

    I can totally confirm the dumb smart people. My dataset: 10+ years landlord in an Ivy League town.