Thursday, January 31, 2008

Of Intelligence and Rationality

Most people will think I'm suffering from a serious bout of 'sour grapes' if I say that the legendary investor, Warren Buffet, isn't that smart after all. Most likely, you'll sneer in disgust and retort, 'if he isn't smart, how did he become one of the richest men in America?'

Before I answer that, let me quote what Buffet thinks about intelligence himself:
"My partner Charlie Munger and Tony Nicely at Geico are always rational. 160 IQs can say stupid things that sound good. People do silly things, whether they have 120 IQ or 160. You can always improve your rational thought. Rationality is the only thing that helps you. One thing that could help would be to write down the reason you are buying a stock before your purchase. Write down 'I am buying Microsoft for $300 billion because you'd force yourself to write this down. It clarifies your mind and discipline. This exercise makes you more rational"
So he's successful only because he is more uber-rational than you or I am, and that has nothing in relation to intelligence at all. So doesn't intelligence mean anything?

Sure it does, just that it doesn't mean you have to be smart in order to be wealthy as Jay Zagorsky from Ohio state University in Columbus found out. From the study, it affirms the fact that while there are research indicating that intelligence is correlated with earning power, they generally end up spending more of their earnings as compared with people of average intelligence.
Contrary to common expectation, intelligence does not always predict financial wellbeing. Even though smart people earn more, on average, it does not protect them from financial difficulty.

New research has found that people who score higher on intelligence tests end up with the same net worth as others when lifestyle factors are taken into account. And the study confirms that you don't have to be smart to be wealthy.

The work reveals that while exceptionally smart individuals typically earn more, they are also more likely to spend to their credit card limit, compared with people of average intelligence.

Jay Zagorsky at Ohio State University in Columbus, US, analysed personal financial information collected from 7500 people between the ages of 33 to 41. Subjects provided details about their cash flow including wages, welfare payments, alimony, and stock dividends and their overall net worth. They also answered questions about whether they had "maxed out" any of their credit cards, missed bill payments or filed for bankruptcy.

All the participants had taken an intelligence exam known as the Armed Forces Qualification Test (AFQT) in 1980, an intelligence test used by the US military to assess recruits. The AFQT can be translated into IQ scores.

Squirreled wealth

On the surface, Zagorsky's analysis confirms the findings of previous studies linking higher intelligence with higher income. "Each point increase in IQ test scores is associated with $202 to $616 more income per year," he says.

For example, a person with a score of 130 (in the top 2%, in terms of IQ) might earn about $12,000 more per year than someone with an average IQ score of about 100.

On the surface, people with higher intelligence scores also had greater wealth. The median net worth for people with an IQ of 120 was almost $128,000 compared with $58,000 for those with an IQ of 100.

But when Zagorsky controlled for other factors such as divorce, years spent in school, type of work and inheritance found no link between IQ and net worth. In fact, people with a slightly above-average IQ of 105 , had an average net worth higher than those who were just a bit smarter, with a score of 110.

Cultural trump

People who had divorced once had about $9600 less wealth on average than their never-divorced counterparts. And those who smoked heavily had an $11,000 reduction in net worth. These external factors rather than IQ could explain the differences in wealth, Zagorsky suggests.

"IQ is clearly overwhelmed or trumped by the cultural imperative to consume," says economist Richard Wolff at the University of Massachusetts-Amherst, US. "People with higher IQs are acutely aware of all the goods and services that they can consume," he says.

Wolff believes that smart people often have high expectations for what they deserve. "It's a notion of 'That's what I'm entitled to as an American & that's what I get for working hard.'" He notes that wages of American workers increased steadily, in real terms, from the 1820s to the 1970s, and people in the US expect their standard of living to constantly improve. However, the buying power of US wages has recently declined.

Reference: Intelligence (DOI: 10.1016/j.intell.2007.02.003)
It seems like the best way to get rich is probably to stop smoking, drinking and partying instead. It also means we shouldn't get too jealous just because someone else appears to be better off than you just because they can afford more 'visible', conspicuous spending. I don't think happiness and satiety has much to do with how much you can write out of your cheque-book, don't you agree?

Additional Links
[1] Smarter People are no Better Off:


bgsu_drew said...

Buffett never says he's unintelligent or "successful only because he is more rational than you or I." He is simply saying that _he is rational_, not that intelligence has nothing to do with success. Pardon me for scoffing at your "he's not that smart" comment, when he has successfully managed billion dollar funds for years.

And the article text you cite says nothing about drinking or partying having any correlation with wealth.

Is there really no relation between IQ and net worth? From TFA:
"The median net worth for people with an IQ of 120 was almost $128,000 compared with $58,000 for those with an IQ of 100."

Vincent Liu said...


First of all, thanks for dropping a comment, and your insightful criticism is well appreciated. I'm glad someone actually did caught on to the fact that I had wanted to convey, that intelligence has no correlation with rationality, and the tongue-in-cheek comment I made about Warren Buffet 'not being smart' has certainly worked towards it's desired conclusion!

I quoted 'smoking, drinking and partying', as a factor. Strangely you've decided to cite two out of three factors I've mentioned. While absent from the TFA of Zagorsky's study, my citation is an incomplete article on his work, and there are further reports where smoking has been cited as a contributing factor to a person's net wealth:

It is no leap of faith, that related 'social vices' such as drinking and partying will likely to be co-contributors in terms of determining net worth. I must, however clarify, being libertarian at heart, I do respect the right for people to enjoy their life however they want, 'vice' or not.

Whether if it is smoking, drinking, or even mundane factors like eating for that matter, it is still undeniable that there is a correlation of lifestyle choices to net wealth, and therefore a need to choose as wisely as possible.

Anyhow, let me pose your conundrum back to you: if IQ is an accurate correlation with net worth, shouldn't Buffet have an exceedingly high IQ that's beyond the likes of Einstein?

"There are lies, damn lies and statistics", and that is good reason to take statistics with a bucketful of salt. It should however not detract the fact your lifestyle habits will determine your net wealth, something to take note for those who take wealth building seriously.

visa credit card said...

that's a diff'rent view. =) but that is true, our lifestyles dictate how much money we have on our pocket. budgeting is the key that most of us have yet to master.

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