Monday, September 7, 2009

IQ and financial acumen

Surprise, surprise! IQ is a general cognitive phenomenon, it's not subject matter-specific. It turns out that having a high IQ means you're likely to make better financial choices.
See which refers to:

People with higher IQs make wiser economic choices, study finds 

People with higher measures of cognitive ability are more likely to make good choices in several different types of economic decisions, according to a new study with researchers from the University of Minnesota's Twin Cities and Morris campuses.

The study, set to be published online in the Proceedings of the National Academy of Sciences this week, was conducted with 1,000 trainee truck drivers at Schneider National, Inc., an American motor carrier employing 20,000. The researchers measured the trainees' cognitive skills and asked them to make choices in several economic experiments, and then followed them on the job.

People with better cognitive skills, in particular higher IQ, were more willing to take calculated risks and to save their money and made more consistent choices. They were also more likely to be cooperative in a strategic situation, and exhibited higher "social awareness" in that they more accurately forecasted others' behavior.

The researchers also tracked how trainees persevered on their new job. The company paid for the training of those who stayed a year, but those who left early owed thousands in training costs. The study found that those with the highest level of cognitive ability stayed at twice the rate of those with the lowest.

The finding that individual characteristics that improve economic success--patience, risk taking and effective social behavior--all cluster together and are linked through cognitive skill, which could have implications for policy making and education.

This matches my modest personal experience. Several weeks ago, I spent a few days asking various friends, "If you had a choice between $500 now or a 15% chance of $1,000,000 in six months, which would you pick?" I thought the choice was obvious, but in practice I was shocked at how many people picked the $500. While I can potentially imagine some scenarios in which the certainty of $500 has greater utility (you're living on the edge already and $500 is enough to keep you from losing your house and spiraling down into the disaster of homelessness) I can't possibly imagine that 60% of the people I know are in that situation, which means that most or all of them aren't making good financial decisions. You will never get another chance at an investment with a 60,000% annualized expected-value rate-of-return. All of the financial decisions you will ever make in your life are a worse bet than that. Take the 15%!!! 

And of course there's the whole mystery of credit card debt. Don't get me wrong--I've found some situations where it's useful to have a credit card, and there are even situations where I can see that it would be advantageous to carry a balance for a brief period of time, if an unexpected expense requires liquidating assets and you need more time to avoid taking a loss. Still, I remember the first time I was ever exposed to credit cards. I was somewhere around four or five years old, and I remember being at a store and watching my mom pay for something with a credit card--the clerk had this awkward contraption with carbon paper, and he put the card in there and worked the device (ka-chunka-chunka!) and gave it back to my mother, then did some paperwork for a minute and then we were done--and I was amazed. You can actually buy stuff without money! I also remember my disillusionment when I found out, later that day, that you have to pay the money back. My disgruntled reaction: "Well then what's the point?!"
And that's still basically my attitude toward credit card debt today. The crazy thing is that it should be the universal attitude, but somehow it isn't.


Rock Is Dead. Long Live Scissors!

"The presentation or 'gift' of the Holy Ghost simply confers upon a man the right to receive at any time, when he is worthy of it and desires it, the power and light of truth of the Holy Ghost, although he may often be left to his own spirit and judgment." --Joseph F. Smith (manual, p. 69)

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