Do smart people make more money? That’s the question we’re investigating in this one of it’s kind article. We’ll explore if there’s a real link between how clever we are, usually measured by IQ tests, and how well we do when it comes to investing our money. Along the way, we’ll examine what researchers have discovered in their studies, to see if there’s a clear connection between being smart and being financially successful.”
The Context
Ever wondered why two investors, both learning from the same source, can end up with such different levels of success? This intriguing article investigates the link between our personal intelligence (IQ) and how well we do in investing.
In an interesting twist during the lockdown of 2020, when people were getting tired of analyzing stock market trends, we stumbled upon a unique idea. We wondered if there could be a link between the speed at which Coronavirus was spreading and the average IQ of different countries.
In our studies, we found that even though some governments were doing their best to contain the situation, countries with lower average IQs were seeing higher virus spread compared to the ones with mediocre healthcare systems but higher average IQs.
For instance, take countries like Peru, Bulgaria, and Montenegro, with average population IQs ranging from 85 to 90. These places had more COVID-19 deaths per million people than countries like Vanuatu, China, and New Zealand, where average population IQs ranged from 93 to 104.
As we deeply feel for the lives lost, our study was focused on understanding behavior patterns at the time. So, out of respect, we didn’t dig deeper into whether this pattern was a fluke due to chance, or if there was something more significant behind it.
We’ll let the experts figure that out, while we turn our attention back to the world of investments while focusing on a correlation of intelligence and investment success.
Disclaimer: Remember that while IQ can be applied to various aspects of life, it might not be a perfect fit for every human endeavor. This article solely focuses on the context of investments.
IQ’s Influence on Investments
If we consider that being exceptionally smart isn’t a prerequisite for making wise investment choices, is having a high IQ truly relevant in this context?
Many individuals hesitate to claim a direct connection between a high IQ and investment success. While intelligence can offer an advantage, effective investing relies on a combination of factors: knowledge, experience, analytical skills, emotional control, and a profound comprehension of market mechanisms. However, a research paper by Mark Grinblatt of the University of California, Los Angeles, Matti Keloharju from Aalto University in Helsinki, and Juhani Linnainmaa from the University of Chicago seems to suggest that the answer might be “yes” to this question.
The paper was published in The Journal of Finance and is available here. This study investigates a controversial and thought-provoking subject. Yet, the authors didn’t explicitly state that individuals with high IQ scores possess a unique ability to select stocks. Instead, they argued that such individuals tend to adhere to some fundamental principles of successful investing.
As a testament to this concept, it’s been rumored that Warren Buffett himself possesses an IQ rumored to exceed 150 (with 160 being the genius threshold). Buffett’s well-known quote encourages fellow investors to take a leaf out of his book:
“Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
As Buffett’s reference to 130 IQ might seem lofty considering the global average IQ range of 85 to 115, his quote however centers more on his temperament rather than just his intelligence. While numerous investors find solace in overlooking the intricate nuances of such statements, the truth is rather unsettling. In the year 2023, India holds the 143rd global rank, boasting an average IQ of 76.24, as reported by the World Population Review.
Oh yes, it appears that our levels of intellect and intelligence are on a decline. This could possibly shed light on why many aspiring Indian investors often find themselves susceptible to free stock tips, quick-rich schemes, and pump-and-dump fiascos.
Expanding on the connection between IQ and investment decisions, an additional study carried out in 2006 titled “Personality and Individual Differences” by Agnieszka Miklewska, Magdalena Kaczmarek, and Jan Strelau suggests there are subtle yet meaningful associations between temperament and intelligence, effectively encompassing IQ. You may click here to read this study on Science Direct.
Something is happening that links IQ with investing!! Let’s dig deeper and find out what exactly Intelligence Quotient or IQ is all about.
What is Intelligence Quotient (IQ)
Before we start exploring the financial aspect of human intelligence, let’s get a grip on the basics of the term IQ.
Back in the early 1900s, a French psychologist named Alfred Binet came up with a way to measure something he called “intelligence quotient” or IQ. This IQ measurement helps tell how smart someone is and how much potential they have to learn. But, when it comes to investing, there’s been a big debate about whether people with high IQs are better at it than those with lower IQs.
Imagine IQ as a tool to see how well someone uses their brain to solve problems and figure things out. They test this by checking how well someone remembers things in the short term and the long term. Indeed, having an elephant’s memory can be quite advantageous when it comes to investing.
Around the world, most people’s IQ falls between 85 and 115, which is considered normal. Only about 2% of people score above 130 and are considered really smart. But having a high IQ isn’t just for bragging.
To give you an example, let’s think about the thinking abilities of ChatGPT’s AI models. In March 2023, a psychologist named Eka Roivainen tested ChatGPT using a quiz called the Wechsler Adult Intelligence Scale.
Chat Gpt scored 155 on this test.
Although it wouldn’t be right to directly compare investors to AI in terms of number-crunching, the significance of human thinking skills essential for investing cannot be ignored.
The Concept of Financial IQ
Financial IQ is like being clever about money matters. It means knowing how to handle money well, making wise decisions about investments, and grasping concepts like budgeting (planning how to use money), saving (keeping money for later), investing (using money to earn more money), and understanding various money tools and markets.
Let’s think about this using the Indian stock market. Imagine two people, Ramesh and Suresh. Ramesh has a high financial IQ. He understands which companies are performing well, so he puts his money into their stocks (pieces of ownership in companies). As these companies do better, the stock values increase, and Ramesh earns more money.
On the flip side, Suresh lacks a strong financial IQ. He invests money randomly and on biased advice without truly understanding companies or the market. Sometimes he makes money, but other times he loses. He simply didn’t have the proper knowledge to make good financial choices.
Having a solid financial IQ is like having a map to navigate the world of money. It helps you handle your money, make intelligent investment choices, and work toward financial stability and success.
Boosting Financial IQ
Understanding IQ is quite intricate, and its levels can vary significantly among adult investors. However, it’s important to acknowledge its link to overall investment success. Despite claims from biased experts who aim to sell their products, there’s a mix of positive and negative news for our readers.
Although genetics and early childhood experiences largely shape Intelligence (IQ), studies indicate that specific cognitive training and educational programs may result in only minor enhancements in IQ scores for adults.
While substantial IQ improvements might be rare, consistently engaging in cognitive exercises, adopting healthy habits, and employing effective investment strategies can have a favorable influence on cognitive abilities, ultimately contributing to successful investing outcomes.
Ten Pro Tips To Improve Financial IQ
1. Explore and Learn
Look into books and legitimate online courses that talk about money. You’ll discover important things about saving, investing, and making smart money choices. Even if some things seem tricky at first, learning about money will eventually help you solve money problems.
2. Set Money Goals
Think about what you want to do with your money. Maybe you want to buy useful things or save up for a special trip. Having goals will help you make a plan and decide where and when to use your money.
3. Make a Money Plan
Create a budget to see how much you earn and spend. This will help you use your money well and avoid spending too much.
4. Learn About Assets
Find out about ways to make your money grow, like stocks (parts of companies), bonds, and savings in banks.
5. Stay Updated with Financial News
Keep up with news about money and its effects. This will help you understand what’s happening in the money world. Reading the news along with learning will help you tell apart important info from just noise.
6. Get Advice from Smart People
Talk to adults and experienced veteran players who know a lot about money, like financial advisors. They can give you good advice about how to handle your money.
7. Try Saving Money
Even if it’s just a little bit, try saving some of your money. Doing this regularly will help your money grow over time.
8. Learn from Money Mistakes
It’s okay to make mistakes with money as long are you aren’t going broke. Use these mistakes as lessons to make better choices in the future.
9. Teach Others
Share what you know about money with friends or family. Teaching them not only helps them but also makes your own understanding of money better.
10. Play Money Games
Have fun with games that teach you about money, like board games or apps. This way, you can learn important money lessons while having a good time. Monopoly is a great game to start with.
Conclusion
Successful investors indeed possess above-average IQ and that level of intelligence (IQ) is directly related to money, but it’s not the only important factor.
Having a high IQ can help, but if you’re too greedy or overly aggressive, it might not guarantee consistent profits. Sometimes, people with high IQs make mistakes in money matters due to these traits. However, if they improve their financial intelligence, they can quickly learn from their errors and recover from losses.
Investors like Warren Buffett suggest that having an IQ of around 130 can make someone a good investor. However, the average individual IQ and other factors can lead to different results and levels of success.
Keep in mind, the facts presented in this write-up are based on studies with limited sample sizes.
Although publically discussing IQ can be delicate, it’s important to remember that everyone’s IQ is unique. Still, it’s beneficial to consider factual information and aim for improvement. If you possess a higher IQ, making wise decisions while investing becomes crucial. On the flip side, even with a lower IQ, there’s an opportunity for positive development and eventual success.
We wish you luck in your investment journey.
