Robert Shiller has a new NYT column riffing on an academic paper from economists Mark Grinblatt (UCLA), Matti Keloharju (Aalto University), and Juhani T. Linnainmaa (University of Chicago) on the subject of IQ and investing.You can download it here from SSRN.
The gist: People with higher IQs follow better rules for investing.
Here’s the abstract:
Stock market participation is monotonically related to IQ, controlling for wealth, income, age, and other demographic and occupational information. The high correlation between IQ, measured early in adult life, 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 non-familial 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’s cool — as Shiller notes — is how they did the study. Everyone in the Finnish military has to take an IQ test, and tax records are public, so they were able to get a detailed look at people’s holdings, and compare them against IQ results.
ADDED: Looking through the paper more, the wealth of information from Finland seems pretty remarkable. It’s quite the useful dataset.
We study Finnish stock market participation at the end of 2000 as a function of IQ measured early in adult life; we also study the relation between IQ and various contributors to portfolio risk and return. The IQ scores are comprehensive for Finnish males in a 20-year age range because they are obtained on induction into Finland’s mandatory military service. We have IQ data on all inductees entering service between 1982 and 2001, as well as stock registry and mutual fund ownership data that unambiguously assess inductees’ stock or mutual fund ownership later in life. We also have the year 2000 tax returns of approximately 160,000 of these inductees. The tax returns contain subject-level controls for different types of wealth, income, marital status, children, age, home and foreign asset ownership, primary language, employment status, and occupation (including whether one is an entrepreneur, farmer, or finance professional). We control for education, using zip code level data for each age grouping.