Brains and Wealth - Updated

According to this research, brains explain income inequality better than they explain wealth inequality. Apparently, smart people ain't so good with saving and stuff:

A Wealth of Smarts Does Not Guarantee Actual Wealth, SciAm: A new analysis of data from a long-term study shows that you don't have to be smart to be wealthy.

Just because you are smart doesn't mean you can balance a checkbook, or tackle any of the other tasks that might make you wealthy. A detailed study of 7,000-plus Americans followed since their teen years in the late 1970s reveals that intelligence provides more earning power but not necessarily more accumulated wealth. "The smarter you are, the more income you have," explains economist Jay Zagorsky of Ohio State University... "For wealth, there is no relationship." ... In 2004 a collection of 7,403 30-something baby boomers answered questions about their financial status, including whether they had ever maxed out any of their credit cards, fallen behind in bill payments or declared bankruptcy. ...

This same group also participated in an IQ test in 1980 as part of their enrollment in the National Longitudinal Survey of Youth. The Armed Services Vocational Aptitude Battery consists of 10 tests, four of which—word knowledge, paragraph comprehension, math knowledge and arithmetic reasoning—the U.S. Department of Defense uses to assess the intelligence of recruits.

Zagorsky used these intelligence scores and compared them with financial data collected in 2004. For each IQ point, there was a rise in income of between $202 and $616 annually. ... But this higher yearly income did not translate into higher wealth. ... "There are some very smart people who get into financial difficulties," Zagorsky notes. "Even smart people don't save."

When Zagorsky controlled for variables like race, education, job status and even factors like smoking, the gap between IQ and wealth remained the same. "Why don't smart people do financially better is the next question to answer," he says, adding that he is completing a follow-up study examining the relationship between intelligence and saving rates. And the probability of missing a payment actually increases with IQ score, he notes. Explanations are lacking...

Here's one potential explanation. IQ tests are bad at measuring whatever intelligence is involved in wealth accumulation and hence have poor predictive ability.

As someone who was once called into the principle's office in high school to be asked if I'd intentionally screwed up on the IQ test they gave us, I don't much trust the tests. Apparently the test placed me on the borderline of needing special ed even though earlier tests had been much different. (With my history with the principle to that point, it wasn't my first visit to see him, he had good reason to wonder. It was a small school and the average score was affected so they even called my mom to try to get me to admit it, kind of embarrassing in high school.) I did try on the test, so it was puzzling and kind of funny at the time, but I don't think they believed me. Other people tell me they think the test was pretty accurate in my case, but I have less faith in the tests than they do.

Update:

The Real Cost of Education, by Kevin Stolarick, Creative Exchange: Education (human capital) solves all our problems, right?  Right??  It increases income, leads to growth, generates innovation, and is the reason cites from New York to Topeka to Seattle chase recent college graduates.  Right??

So, Charlotta Mellander and I decided to take a look.  Using the new Forbes Billionaires list ..., Charlotta and I took at a look at the education levels of the world's billionaires.  Forbes reports that the average net worth of individuals on the Forbes 400 with a college degree is $2.13 billion.  But, the average net worth of individuals on the Forbes 400 without a college degree is $2.27 billion. ...

If we look at just the top 50 billionaires (average net worth $19.4 billion), we find that 37% of them do not have a college degree (average net worth $21.3 billion) while 63% of them do (average net worth $18.7 billion).  ...  However, many of the billionaires on Forbes' list are second generation or more.  So, if we consider inherited wealth, what happens to the numbers?

Of the 24 of the top 50 who inherited their billions, over 71% have a college degree.  Of the 26 who worked for their billions, just under 58% have a college degree, substantially fewer than for all billionaires or those that inherited. ... Those who inherited their money, not only were more likely to get a degree, but it actually benefited them.  Among the 24 in the top 50 inheriting their money, the average net worth is $1.4 billion more if a degree was earned.  Finally, we found a place where the degree pays off -- of course it helps a lot if Sam Walton was your father.

Comments

[realpc]

I don't trust those tests very much either, although I guess there is no other way to measure whatever it is we call intelligence.

I think our culture's ideas about intelligence are wrong in many ways. I do not believe some people are smarter than others, although of course it seems undeniably true. It's sort of an illusion, hard to explain this quickly.

I think that what we call intelligence is really an ability to get interested in something and focus on it. In school, the smart kids are the ones who happen to become interested in the subjects they are forced to study. Once you get interested in one thing, you can use the same technique on other things.

So a kid who becomes interested in physics, for example, becomes "smart." He has learned how to focus intensely on something complicated, and to finally get it. Once you know that, you can do it with anything. I don't know if a supposedly retarded person could do this -- maybe they can, within limits.

So intelligence is mostly learned, in my opinion. And intelligence is a very limited thing. It's an ability to focus intensely. It does not give you the big picture, or wisdom. Those are learned also, but from many varied experiences.

So being smart with money is something people learn from caring about money and having experience with it. I am not at all surprised there is no correlation with IQ. The smart kid in school never figured out that money is interesting or worth caring about. He/she though he/she would always have money because he/she's smart.

But being smart about money does not use different kinds of brain cells than being smart about math or history.

Anyway, this is good evidence to support my suspicion that our ideas about intelligence are defective.

A person's intellectual ability is mostly self-imposed and culturally defined. Now that success depends on brains rather than muscles, IQ and education have become status symbols. It has become political -- blue state liberals are smarter than red state rednecks.

This is one of several reasons I stopped being a Democrat. I was always a blue state smart person. Until I realized how much of that is an illusion.

[reason]

Realpc...
you stumbled across the real explaination I think.

So being smart with money is something people learn from caring about money and having experience with it. I am not at all surprised there is no correlation with IQ. The smart kid in school never figured out that money is interesting or worth caring about. He/she though he/she would always have money because he/she's smart.

Really smart people mostly simply don't value being extremely wealthy. The accumulation of vast wealth is a sign of a psychological imbalance. Of course they could work out how to do it, but they basically don't want to.

[reason]

Mark...
Curious anecdote. I wonder if something went technically wrong with your paper (a page got missed out or the markings got offset or something).

Realpc...
Now I agree the CONCEPT of intelligence is somewhat fuzzy. But as long as we think that there are inheritable differences between individuals and as long as it is clear that some individuals are smarter (in some sense) than others (i.e. some are retarded), surely it is possible that there are measureable differences between individuals that are not just environmentally determined. Are we smarter than monkeys and are monkeys smarter than say jellyfish? And if what you say is true then there should be evidence of large changes in scores over time as different people discover the "trick". Have you any evidence for your hypothesis?

I know the people who design these tests have done lots of testing and believe they measure something real, that is also not learnable. There are however, some unexplained results such as a trend over time towards higher average scores on the same tests. But as far as I know, the same people tested at different ages get pretty much the same rank scores, Mark's stuff up excepted of course. Whether intelligence is anything more significant than simply what ever intelligence tests measure is another question of course.

General...
the result on income, seems remarkably weak to me. The difference between a moron and a member of Mensa comes out at the lower estimate as about $6,000 a year. I thought the difference between male and female was that much!

[Emmanuel]

Ya now, dis expleins a lotof tings ;-)

[Tim Worstall]

The IQ test thing resonates with me. I have a form of visual blindness (yes, I know, perhaps not the best phrase) in that while I can see perfectly well, I don't really "get" pictures and images.
So that part of the tests that deals with pattern matching etc makes little sense to me at all.
That I make a decent living as a writer means that I really can't be at the IQ level (along with the mouth breathers and knuckle draggers in hte special needs section) that the tests imply.

[Holly W.]

I always do well on IQ tests, and my income is beans. On the other hand, I love personal finance and money management, so I skew this data by occupying a low income-relatively high net worth rung on the wealth ladder. Go figure. The mother of a childhood friend of mine always said it's ambition and application that matter more than IQ, and I dare say she's right.

I sometimes think that the "smarter" you're perceived to be, the more it's just assumed that you'll pick up the how-tos of money management on your own, so no-one bothers to teach you anything useful. Back when my BA was freshly minted, I met a guy who had an MBA, but he also had $7,000 in a no-interest checking account before it even crossed his mind to open a savings account paying 5% ... this was not a guy on the road to wealth accumulation, at least at the time. Meanwhile, I'd opened my first stock mutual fund 18 months after graduating from college. I've wondered ever since what on earth people learn in business school!

[bakho]

I know a financial advisor who claims that UAW members have better portfolios than most college professors. The difference? UAW members have free professional advice for managing their portfolios. Most college professors do it themseleves without professional advice.

[bakho]

Curious how they factor inherited wealth and legacies?

[Ninjaplease]

Re: Tim Worstall,

If you've got a driver's license, please tell me what areas you drive in, so I know to stay a way from them.

[Holly W.]

Bakho: Curious how they factor inherited wealth and legacies?

I wondered that, too.

[maria]

I suspect wealth accumulation, assuming reasonable intelligence and reasonable income, is more a personality matter than an IQ matter. Saving and investing and not spending much (Freud's 'anal-retentive' personality) tends to increase wealth even if your IQ is nothing to crow about. The acquisitive instinct, being a "miser", has a lot to do with it. Knowing where to put your savings, which stocks to buy, doesn't require a genius IQ. It only requires some knowledge and good sense.

[maria]

Speaking of brains and wealth on a national scale, I thought this was interesting:

http://news.bbc.co.uk/2/hi/uk_news/education/6589301.stm

High IQ+low labor costs=China's astounding economy.

[reason]

Knowing where to put your savings, which stocks to buy, doesn't require a genius IQ. It only requires some knowledge and good sense.

Actually, I wonder if that is a hint as well. Making LOTS of wealth through investment is I'm sure a matter more of luck than good management, sense doesn't come in to it. Most high IQ types are perhaps too sensible and only end up with moderate wealth. I wonder what the median wealth figures look like at each IQ level.

[anne]

Israel Scheffler and WVO Quine would only use the terms intelligence[s] and potential[s] in describing what might also be called "capabilities."

[Kevin]

I guess the principal wasn't your pal.

[Callahan]

A fool and his money soon part. I've always had trouble with parting money. Sure I could have used my head a little better, and would probably be much better off (money wise) as a result.

I suspect there are some of us who really do not aspire to be rich, instead we pursue a good living, and probably all too often live for today.

But that good living in my case at least is slipping away as ever increasing prices and stagnant wages chip away at it. I'm from Michigan, that's probably all I needed to say.

Yup, I should have done things a little differently.

[Bruce Wilder]

This morning, while I was watching the Today show, a billionaire (Martha Stewart) lectured the audience (including me) about how to use a broom, as well as the finer points of how to store a broom.

I am definitely doing something wrong. But, I am happy to report that my broom use and storage meet Martha's high standards.

[Dave Tufte]

I wonder if the definition of wealth is part of the problem.

I married into a family that has a great deal of difficulty holding on to cash. They're bright enough, so rather obviously, they have a lot of stuff instead of cash.

They're not unhappy with this situation.

On the other hand, I am. But I am conditioned by family and an economics Ph.D. to put a really high value on liquidity, and to respect the high returns offered for liquid assets (I am thinking of stocks vs. furniture here, not stocks vs. bonds).

Now that I'm at the point where I have tenure and can think about broader issues, I am starting to wonder if we ought to start asking people how wealthy they are, instead of measuring it with financial accounting.

If I can offer an analogy, the current way of measuring wealth is akin to accounting profit. The problem with accounting profit is that it doesn't count the opportunity cost of foregone opportunities - doing so yields economic profit.

Perhaps we need a version of economic wealth rather than accounting wealth. Accounting wealth is presumably higher because it counts assets like cash at face value, and assets like furniture at a value that accounts for both depreciation and lower liquidity. But, the high valuation of cash clearly misses an opportunity cost that is apparently very important to many, many people: a lot of them don't want to have a lot of cash, because it means forgoing opportunities to have stuff.

Until we start thinking about the problem this way, I am dubious of results like those in the post.

[realpc]

reason,

Yes of course intelligence is partly inherited, and humans are smarter than jellyfish. But I am skeptical about how much differences between individuals are carved into the physical brain and unchangeable. We know that the brain continues to change its connections throughout life.

"the same people tested at different ages get pretty much the same rank scores"

Yes, people tend to stay in the rut they were shoved into during childhood. A kid is labeled as dumb and therefore chooses a non-intelliectual career and never tries to study.

My own experience was an exception. I got pretty good SAT scores in high school, but not great. I had no interest in any school subjects and never studied. After I had graduated from college I became curious about several subjects and learned how to study. Learning how to study was just a side effect.

I had heard all about how IQ doesn't change and did not think I had become any smarter. Then I applied for graduate school and my GRE scores were much, much higher than my old SAT scores. I took the GRE twice, for two different graduate degrees, and they were much higher than my SAT scores both times. Actually, it was mostly the verbal score that increased, because my studying had been mostly verbal until that time.

My experience convinced me that intelligence is not fixed. I am unusual because I went from being a lousy student in high school and college to someone who loves to learn. It was only because I became curious about a couple of things and getting the answers required a lot of reading. I didn't know if I was smart enough for graduate school since my college average was C+. But I went through two graduate progams getting A on every test.

After that I knew I could learn anything, given enough time and motivation.

And I believe that's true of just about everyone. Now we have a meritocracy based on brains, with snooty educated people looking down their noses at middle America. The idea is that brains are inherited and the smart people should therefore be in charge.

I just don't believe it. The smartest person is not all that far from the average. And being smart just means having a lot of experience with reading or math, and having a lot of technical knowledge in certain areas. Smart, highly intellectual, leaders would not do a better job than your typical extroverted politician.

[cm]

There appears to be a misconception that a higher degree of (subcategories of) intellectual performance/capability necessarily translates into higher fitness for functioning in our society, perhaps because of the underlying tenet that our (Western) society has been "rationally purified" into a meritocracy governed by reason and intellect. Perhaps the latter is the actual misconception.

[cm]

In other words, "smarts" in matters social is not the same thing as good performance in abstract thinking exercises in formal domains, and the workings of any society is almost by definition based on some version of the former.

[kharris]

We know the story of Thales, yes? He may have been the first guy ever asked "if you're so smart, how come you ain't rich?" Annoyed or cocky (it isn't recorded which), Thales went to all the local olive press owners prior to the harvest and contracted to use their presses. When the harvest came in, the local farmers faced a de facto olive-press monopoly, and Thales grew wealthy, by the standards of his time and place. Job done, back to intellectual enquiry and farming.

I offer this story in support of reason's view that smart people may simply not value wealth all that much.

[cm]

kharris: Well, Thales was simply smart by a different than the "IQ" metric. The old Greek stories also offer some material of social ascent being a matter of smarts in which butt to kiss and which to kick.

[Callahan]

Given our current national savings rate, and our current national debt rate, I'd venture to guess that our secondary schools are not covering basic personal (family) economics very well.

But I'm just one of those dumb poor guys, what do I know? What I do know is that over the last thirty years or more, every political campaign, local , state, and federal ALLWAYS produces the same, "we gotta have better edjookashun" stuff. We throw money at it when we can, and still we are where we are.

To Bruce and the Martha broom thing, good stuff.

[Ninjaplease]

"Yes of course intelligence is partly inherited, and humans are smarter than jellyfish."

How many wars have Jellyfish started and conducted in the name of ideology or money, both of which aren't real?

[chris]

My high school made everyone take the armed forces test (asvab, I recall). I didn't want the recruiter calling me any more than he did already, so I deliberately wrote in the wrong answers. I tried to get the minimal score. I even misspelled my own name. It didn't work. They kept calling.

[maria]

reason: yes luck has a lot to do with investing. But one needs to have some idea where "luck" might strike. I made a bundle investing in biotech in the mid-1980s when there were only a few companies involved, the field was ready to boom, and just one home run (Amgen) could pay for a lot of strike outs. But one had to be aware that biotech would boom; most people were not. Gates is certainly bright, and very lucky, but as he has said he and his friends knew that PC software was going to boom while not many others did. Is that high IQ or just good information and good sense?

[reason]

Maria,
are you sure that it just wasn't where Gates happened to be, he had inside information and contacts and the story went from there. The rest just might be ex-post rationalisation. From every winner there are ten losers. Maybe sensible people in the comfortable middle class don't see a need to take risks. As I said you clear the issue up first use median/IQ (if you have enough data) or Bayesian rank tests if not. Far too many statistical tests these days use the mean on highly skewed data.

[Outside the Box]

IQ tests were designed to measure academic aptitude. Basically, the ability to learn a complicated trade. It makes sense that those who have the ability to master a complicated craft would earn more than those who cannot. Even many non academic trades such as electrician generally attract higher than average IQ practitioners, because of their degree of complexity.

In an era of constant inflation, saving money does not guarantee eventual wealth. Inflation erodes bank savings accounts, thus preventing wealth accumulation in a risk free manner. Risk taking is necessary to stay ahead of inflation, and not everyone has a temperament suited to risk taking. Many high IQ people can figure out what to do intellectually, but are not temperamentally able to implement the plan. Losing money on an investment can have a large emotional impact, and some people give up on investing after a loss. Periodic losses are an inevitable part of investing.

Other people were taught to spend every last dime as soon as they earn it. They follow the tradition they were taught. Basically, an emotional decision.

Of course, a truly wise person will not wear himself out trying to get rich. However, storing some assets up to take care of your family during hard times is sensible. History shows that hard times happen to many people on a regular basis.

[bob]

PC, your analysis was well articulated.
Thanks for the insight.

[maria]

reason: as I understand it, Gates left Harvard to go into the software business because he knew it would boom. The luck came later, when IBM came to him asking him to develop software for their machines. He didn't have any so he quickly bought a program from somewhere else. If he hadn't had the good sense to realize that PC software would boom, he would not have left Harvard, or been where he was when Lady Luck struck. So I think it was quite a bit more than just "being where he happened to be." It took some smarts to be there and be ready.

[maria]

Gates merits a bit more comment I think. He obviously had a very high IQ or he would not have been at Harvard. But a more "normal" high IQ kid would probably have stayed at Harvard and gotten a degree and then more degrees. Gates had the guts or willingness to take risks or whatever it was that caused him to drop out and go after what he saw as a much bigger fish. That is more than just IQ. What it is is difficult to define. But it is in the personality, not the brains. When those "smarts" for want of a better word are combined with high IQ AND lotsa luck you get the richest man in the world. Simple, no? LOL.

[Holly W.]

Maria: That is more than just IQ. What it is is difficult to define. But it is in the personality, not the brains.

I think you're getting at The Economist was trying to define last year when they ran a cover story about the lack of "talent" in the world ... part of it has to be brains, but the "right" personality type is clearly important, too.

[ki]

What the IQ test all comes down to is knowing how to take the test. Like any other test, the more you get used to the types of questions and the anticipated answers, the better you score. That doesn't make you a genius :)It just shows that you can pick up on patterns.

[donna]

IQ tests measure how well you can take tests. That's about it, really.

[Kimmitt]

Yeah, one of the qualifications for being a successful businessperson is to not get bored with the day-to-day operations of running a business -- to have a personality which is either comfortable with drudge work or intensely competitive enough to make any part of running the business entertaining. I'd see little correlation between these and intelligence.

Separately, one is looking at this wrong. If smarter folks have higher incomes, then obviously they have some productive factor which is more useful than less smart folks -- that is, they've invested in their human capital. That doesn't show up on balance sheets, but it certainly affects lifetime earnings expectations, which would then affect consumption decisions.

[Sonia]

We need some more information here. I believe that the AFQT has and certainly had in the old draft days some tool using questions that may be gender biased. I would like to see the results for income and for wealth for males and females seperately. If the results seem anomalous, the results may be.

Thanks to Anne for pointing out my incoherent sentences in my response to another item.

[Robinia]

Hmm. Seems to me that the lack of connection between wealth and (imperfectly measured) intellect just proves that no matter how smart you are, you can't effectively pick the relatives from whom you will inherit wealth (or not). The age of the people surveyed would make for a rather large confounding effect from inheritance of wealth by some and not others.

[James Killus]

I.Q. correlates fairly well with how one does in academia, which happens to be the population that is used to calibrate the tests. At the lowest scores, I.Q. correlates primarily with developmental disorders, most of which are not genetic per se, but which can have a genetic component.

At the upper end of I.Q. scales, the tests often show a phenomenon called "rolloff" where individuals who are smarter than the test designers see more right answers than did said designers. Thus, "intelligence" becomes a matter of "how well can you simulate the intellect of a psychologist?" Oh, and in order to obtain proper gaussian distributions, test designers simply shorten the period of time given for the test. That randomizes the scatter nicely.

State lotteries create hundreds of new millionaires every year, and I'm sure that picking winning tickets requires some special intelligence factor that I can describe and refine if given a modest grant, not enough to make me wealthy, you understand, but enough for my modest living requirements.

Well, it's no trick to make a lot of money... if what you want to do is make a lot of money.--Citizen Kane

If you're so poor, why aren't you dumb?--Ducks Breath Mystery Theater

[Noni Mausa]

Here's a quick and easy one-question intelligence test. Simply say to the person you're with, "Did you know that 50% of (Americans / women / men / Texans) are below average in intelligence?"

If they say, "Yeah, so what?" they are in the upper half.

If they get mad at you, they are in the lower half.

My experience is about four out of five people respond as though I had insulted the Americans / women / men / Texans. So sad...

Noni
not rich -- so I must be smart!

[dd]

I don't think it's about intelligence but the emotional relationship to money. Those who are able to emotionally detach from money are better investors; but those who associate money with security are better savers. Intelligence is a rational measure but in the US money has so many emotional overtones that intelligence doesn't always translate into successful investing.

[Joseph Hertzlinger]

In 2004 a collection of 7,403 30-something baby boomers...

That doesn't sound right. Were they 30-somethings or were they baby boomers?

In the former case, the news is unsurprising. Some of the brighter people in the sample would still have college loans or are in grad school.

[cm]

reason: "[For] every winner there are ten losers."

Not plausible, there must be more. But then what does "loser" mean here? A good number of people doesn't achieve particular goals they set to themselves, but still manage to conduct a fairly satisfactory life.

[reason]

cm...
I wasn't talking about individuals, I was talking about investments.

[reason]

cm...
I'll nuance that, I was talking about making risky (but potentially rewarding) investments.

[real person from the real world]

IT's about thime we start questioning the ability of tests and other metrics to make decisions that affect human beings in very serious ways. I highly recommend to the readers of this blog a book by a Yale Grad: Annie Murphy Paul, title: The Cult of Personality. The book chronicals how some of these tests being used for all sorts of purposes today, including employment, got invented. I am not a scientologist who rants about the real help that psychology has given to many, but I do question the uses, or rather mis-uses we are putting more questionable tests to, more and more. I work in staffing, and the mind games that some companies are putting ordinary people thru to get a really ordinary job, while they let psychopathic CEOs with over sized egos run companies into the ground ought to be questioned.

[Jonathan Goldberg]

Richard Feynman may have been the all-time champion on fouled-up IQ tests. He took one in high school that came back 125. He thought it was funny to spread this around, although I once read an article by someone who actually BELIEVED it. As to where it came from, my favorite theory is that some well-meaning clerk corrected 225, an obvious misprint...

A little anecdote about Bill G.; when the CEO of IBM heard he was one of the candidates to provide the PC OS, he said "Oh, that's Mary Gate's boy." He and Mary were both on the board of some charitable organization.

Switching topics yet again, multiple intelligences are established as received wisdom now, and emotional intelligence has a better correlation with success than IQ does. Old stuff.

[James Killus]

There are no standard I.Q. tests that will give a value of 225. The most likely test for Feynman to have taken is the old Stanford-Binet test, which has a top score of 140+.

[vijay chander]

This is my view of Bill Gates:

Tought to believe this, but he was ALREADY born with a silver spoon in his mouth !! (Papa Gates was ...and is...a prominent attorney while his mother was known to Tom Watson at IBM through their charity work and place in high society)...Thus, he actually could AFFORD to drop out of Harvard, what many MIDDLE-CLASS high IQ kids could not do...so this wasn't in any sense of the word "Risk-taking" in the true sense...even if MSFT was a gigantic flop...young Bill Gates would have ended up with at least USD 10 million....food for thought (This is NOT an ANTI-Bill Gates tirade...he is obviously smart, but the RICH THINK ABOUT RISKS DIFFERENTLY THAN OTHERS...high IQ/smartness/foresight is not a determinant here)

[Sam Henry]

Bill Gates made his monuy by requiring anyone who wanted his software to include it on every computer they sold or pay him for it anyway and other tricky schemes. This is what many people would call cheating.