What High IQ Investors do Differently

Since I know that all of my clients and readers are highly intelligent people this piece is just for you.  Compliments of Yale Economic Professor Robert Shiller co-founder of the Case Shiller Home Price Indices is his article in the NYT on this very subject on how high IQ investors invest.


According to a paper published in the December issue of The Journal of Finance, is a qualified yes.  The paper, was published by Mark Grinblatt of the University of California, Los Angeles, Matti Keloharju of Aalto University in Helsinki and Juhani Linnainmaa of the University of Chicago.  What is interesting as the article points out is that there data came from Finland.  The reason, Finland requires all able young men to perform military service. As a result, the authors were able to obtain I.Q. test scores of all of men conscripted in Finland from 1982 to 2001.  In addition Finland had a wealth tax, and its citizens had to report their investment portfolios to the government. This means the authors could compare the men’s I.Q. scores and their investing habits, as well as link those factors to other individual data.


At the end of the story the point Shiller is trying to get across with a successful investor at any level is that they develop a sense of trust with the manager of their assets.


Via the NYT piece

• The authors didn’t claim that people with high scores had some kind of monopoly on stock-picking genius. What they did contend was that these people tended to follow basic rules of successful investing.
• In some ways, it’s a puzzle why I.Q. scores would matter in this regard. After all, the view that people should diversify their investments, to avoid putting all their eggs in one basket, is widely accepted. It’s not hard to diversify a portfolio or to have someone do it for you.
• Yet only about half of all American adults have money in the stock market, directly or indirectly. So maybe something else is going on. If people can’t figure out the financial markets on their own, they can entrust their money to professionals or heed professional advice. The real problem may not be that many people lack investing savvy or smarts. Perhaps what they lack is trust, or confidence in whom to trust.

• Knowing whom to trust, and relying on those who are trustworthy, is itself an aspect of intelligence. Mr. Guiso and his co-authors cited research that suggested that investment decisions relied significantly on a part of the brain called the Brodmann area 10. This region of the frontal cortex is believed to be associated with our ability to make inferences about others’ preferences and beliefs based on their actions. Such social intelligence seems to reward some people more than others with an ability to put standard investment advice into practice. 
• But if we can somehow foster more trust in investment professionals, a full spectrum of people — whatever their I.Q.’s — might adopt a more successful approach toward investing.
• Those in financial and educational spheres, must think about how we can restore and strengthen ordinary people’s trust in the financial markets. It doesn’t take a high I.Q. to see that it’s in everyone’s interest to get basic financial decisions right.