Sunday, April 29, 2007

Sunday dollars+sense: The more clever you are...

Worried you’re not smart enough to become rich? Don’t be. The dumbest people get rich. The bright ones max out their credit cards, find it hard to pay bills and go bankrupt.

It’s beyond doubt that bright people earn more. Research just published in the journal Intelligence by Jay Zagorsky from Ohio State University finds that for each point that a US baby boomer’s IQ test score is higher, that persons income is likely to be between $280 and $740 per year higher, other things being equal.

Other studies find the same sort of result. Zagorsky used data from a long-term US study that measured the IQ score, and later the financial situations, of more than 7000 Americans born between 1957 and 1964.

Those with above-average IQs scores were three times as likely as those with below average IQs to earn more than $125,000.

But when it came to wealth, intelligence counted for next to nothing... As Zagorsky put it: “There are few individuals with below-average IQ scores who have high income but there are relatively large numbers who are wealthy.”

How could it be that bright people earn more, but don’t end up with more money? Are they in some sense “dumb” when it comes to managing money, or are they bright enough to realise that income is for spending, not keeping?

It is probably a bit of both.

Zagorsky examined the relationship between IQ and having maxed out credit cards, missed loan repayments and declared bankruptcy. He found an odd relationship. It went up, then down, then up again. For people of below average intelligence, as their IQ rose, their financial trouble increased. Above average intelligence, a higher IQ meant less likelihood of financial trouble, and further above that (above an IQ of 120) higher intelligence meant worse financial strife.

How to make sense of this? The brighter you are, the worse you are with money, unless your intelligence is merely somewhat above average – then you are probably sensible.

Zagorsky says he doesn’t have an explanation, and I don’t either. He says it is possible that as your intelligence increases over certain ranges you become busier and less focused on paying bills. Or maybe the smarter you think you are the more you think you don’t need to be careful.

People not blessed with intelligence and earning power know they have to be careful. That’s their advantage.

Do you have to be smart to be rich? The impact of IQ on wealth, income and financial distress. Jay L. Zagorsky, Center for Human Resource Research, The Ohio State University,
Intelligence, 28 March 2007.