« Robert Samuelson: Inflation Terminology and the Upside of Recessions | Main | Democrats and Deficits »

Wednesday, April 25, 2007

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.


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.

    Posted by on Wednesday, April 25, 2007 at 12:33 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (50)


    TrackBack URL for this entry:

    Listed below are links to weblogs that reference Brains and Wealth - Updated:


    Feed You can follow this conversation by subscribing to the comment feed for this post.