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:
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.