‘Smart’ money is in stocks
The smarter you are, the more stock you probably own, according to researchers who say they found a direct link between IQ and equity market participation.
Intelligence, as measured by tests given to 158,044 Finnish soldiers over 19 years, outweighed income in determining whether someone owns shares and how many companies he invests in. Among draftees scoring highest on the exams, the rate of ownership later in life was 21 percentage points above those who tested lowest, researchers found. The study, published in last month’s Journal of Finance, ignored bonds and other investments.
Economists have debated for decades what they call the participation puzzle, trying to explain why more people don’t take advantage of the higher returns stocks have historically paid on savings. As few as 51 percent of American households own them, a 2009 study by the Federal Reserve found free 3-in-1 credit report. Individual investors have pulled record cash out of U.S. equity mutual funds in the last five years as shares suffered the worst bear market since the 1930s.
“It’s what we see anecdotally: Higher-IQ investors tend to be more willing to commit financial resources, to put skin in the game,” said Jason Hsu, chief investment officer at Research Affiliates. “You can generalize a whole literature on this. It seems to suggest that whatever attributes are driving people to not participate in the stock market are related to the cost of processing financial information.”