Felix Salmon on IQ and Financial Literacy
September 11, 2012, 01:52 PM
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Felix Salmon writes about planning for retirement in "Who is speaking for the poor?:"

IQ also helps. Check out this chart, for instance, from a very long and detailed paper about the likelihood that a person of given intelligence will be invested in the stock market.


IQ and The Market
The distribution is clear: the smarter you are (as measured by IQ), the more likely you are to be invested in the stock market. And this distribution is independent of wealth: it applies to the rich as much as it does to the poor. Or, as the paper puts it, “IQ’s role in the participation decisions of the affluent is about the same as it is for the less affluent. The definition of affluence—net worth or income—does not affect this finding.” 

Most impressively, check out this paper from 2007. It asked just three “simple mathematical questions” of couples to judge the numeracy of each one. If neither got any questions right, the total wealth of the couple, on average, was $202,000. If they both got one question right, it was $505,000. If they both got two questions right, it was $853,000. And if they both got all three questions right, their average wealth on average was a whopping $1.7 million. (If they got different scores from each other, the wealth ended up somewhere in between.) 

And similarly, at the other end of the spectrum, there’s huge amounts of research showing that if you’re particularly financially illiterate, or you’re not good at numbers, then you’re much more likely to be ripped off by predatory lenders or other scams, be they legal or otherwise. 

There are various conclusions to be drawn here, one of which is that if we do a better job of financial education, then Americans as a whole will be better off. That’s true. But at the same time, financial illiteracy, and general innumeracy, and low IQs, are all perfectly common things which are never going to go away. It’s idiotic to try to blame people for having a low IQ: that’s not something people can control. And so it stands to reason that any fair society should look after people who are at such a natural disadvantage in life.