Gifted Issues Discussion homepage Forums General Discussion What High-I.Q. Investors Do Differently

http://www.nytimes.com/2012/02/26/business/what-high-iq-investors-do-differently-economic-view.html
What High-I.Q. Investors Do Differently
By ROBERT J. SHILLER
New York Times
February 25, 2012

YOU don’t have to be a genius to pick good investments. But does having a high I.Q. score help?

The answer, according to a paper published in the December issue of The Journal of Finance, is a qualified yes.

The study is certainly provocative. Even after taking into account factors like income and education, the authors concluded that people with relatively high I.Q.’s typically diversify their investment portfolios more than those with lower scores and invest more heavily in the stock market. They also tend to favor small-capitalization stocks, which have historically beaten the broader market, as well as companies with high book values relative to their share prices.

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.

The paper, by Mark Grinblatt of the University of California, Los Angeles, Matti Keloharju of Aalto University in Helsinki and Juhani Linnainmaa of the University of Chicago took advantage of some unusual data. The crucial numbers came from, of all places, Finland.

Why there? Two reasons. First, Finland requires all able young men to perform military service. As a result, the authors were able to obtain I.Q. test scores of all of men conscripted in Finland from 1982 to 2001.

Second, Finland had a wealth tax, and its citizens had to report their investment portfolios to the government. This means the authors could compare the men’s I.Q. scores and their investing habits, as well as link those factors to other individual data. Similar data sets aren’t available in other countries, however, so we may not want to generalize too much.

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.

I don't think there's a significant connection to gifted education here. Please can we keep this board a bit more on topic than it's been lately?

I disagree. Learning how to invest your money wisely is critically important, and learning from smart people who got good returns sounds like a good idea to me. My son's school did a course on entrepreneurship last year, and a study like this one would fit into the general ideas they taught.

Even knowing that a study like this exists is a good thing IMO.

I'm pretty sure that one of the things I actually learned in my gifted classes was that short selling existed.

That being said, the most important rule in investing is to buy low and sell high.

Many people do the opposite. That results in significant losses.