Monday, May 21, 2007

IQ and Wealth

What does it take to become wealthy? Before you answer, let's review a few facts. The first one is no surprise:
It seems that the smarter you are, the more you tend to earn. For each IQ point you have above someone else's IQ, you'll earn between $200 and $600 more.
But this one is more surprising: People with high IQ do not end up with more wealth.
We who are smarter than the average bear (I'm including myself and you) would reasonably assume, then, that smarter people would end up wealthier. But that was not suggested by the study. Instead, people with higher IQs and incomes tended to spend more, maxing out credit cards and paying bills late.
The above two quotations are from a summary of research conducted by Ohio State economics professor Jay Zagorsky. Here is another result from a different study of Professor Zagorsky:
Overweight Americans who lose a lot of weight also tend to build more wealth as they drop the pounds.
And yet another Zagorsky fact:
Regression results show lower net worth is associated with smoking, after holding constant a variety of demographic factors.
Finally, recall this lesson:
Stephen F. Venti of Dartmouth and David A. Wise of Harvard concluded that the primary reason for differences in retirement assets was differences in propensities to save. It is not unusual to see low-income households with high savings rates holding more financial assets at retirement than high-income households who saved a smaller fraction of their income.
The neoclassical theory of distribution teaches us that a person's earnings depend on his or her productivity. But earnings are not the same as wealth. The accumulation of wealth is mostly about the ability to exert self-control.
To shop at Ikea, "You don't have to be rich, just smart". To be rich, you don't have to be smart, just have self-control. Another reason to teach good decision making.

via Greg Mankiw Blog

Update: The Audacious Epigone questions the results, and he is right. The quote from Mankiw's blog is misleading. More from New Scientist:
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 – he 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.
IQ doesn't matter once you account for years in school and type of work. But, both of those are impacted by IQ, so I am not sure what this study really tells you.


Audacious Epigone said...


I'm skeptical, but I'm a little crunched now, looking up numbers for Congressional reps and Senators.

Does this guy's study take 401(k)s, IRAs, and other retirement savings vehicles into account? It strikes me as impossible that if such things are considered, that higher IQ/higher income earners end up with net worths indistinguishable from low IQ/low income earners.

Anonymous said...

Does the wealth thing look at decreasing returns? By that I mean, does ever higher wealth bring ever higher happiness? Or is that a "rational" level beyond which one should really slow down and smell the roses?

Is it always smart to want "more?"

- odograph

Fat Knowledge said...


Yeah you are right. Check my update. I figured Mankiw would have dug a little deeper before posting that conclusion.


I would think that wealth does have decreasing returns, but I am not sure that you ever get to a point where more wealth leads to less happiness. Just to a point where more wealth really doesn't make you any happier. I don't know of any research to back me up off hand though.

I also think that there is a point where additional time off/leisure/travel is more valuable than the money you would get for additional work, but this is obviously different for each person. Work also gives happiness beyond its monetary compensation, so you would need to figure that in as well.

Anonymous said...

That's what I mean by "decreasing returns" yes, not a downturn, but less benefit.

For what it's worth, there have been studies that have looked at aggregate wealth (via GDP) and found decreasing returns:

... etc.

- odograph

Fat Knowledge said...


Interesting stuff. Thanks for the links.

Audacious Epigone said...

It's kind of akin to saying:

"Chinese farmers are as tall as NBA players when you control for the length of their pants."

Post a Comment

Note: Only a member of this blog may post a comment.