Monday, September 22, 2008

IQ, Wealth and Income

The lecturer made a remark that was impossible for me to ignore. He said, "IQ has some correlation with income, but almost no correlation with wealth."
It didn't shock me, but I found the part about wealth difficult to accept at an intellectual level. So I checked the Web to see if there was truth to what the lecturer was saying. It looks like he was right. When the journal intelligence plotted IQ against net-worth, they found no real correlation. (See graph.) This is a difficult concept to come to grips with, especially for all those who suspect that their IQ is well above average. The accepted correlation of IQ and income seems to be around 0.4 to 0.5 (Wikipedia.)

In the context of retirement (or more accurately, financial indepence which is one facet of 'retirement') the lesson for most of us is fairly straight forward. If a certain net-worth is a goal, then work towards it diligently.

Thinking damn, I am quite smart, so I should be a lot richer than I currently am might actually be counterproductive.Your net-worth won't balloon all by itself just because your IQ is high.


Arvind said...

The data hides initial starting conditions, I think. GW Bush for example is really rich purely based on initial conditions at birth.

Heres my guess on how earning $ and IQ look like, for children from middle class families. (For this limited initaial condition, in other words.)
( a ) Linearly increasing with IQ in the IQ region [0,100+2*sigma], where sigma is std dev (Is this equal to 30?)
( b ) For IQ greater than 100 + 2 sigma, you are probably poorer than the 100 IQ for two reasons
( i ) You are a theorist academician. { Most math profs have much higher IQ than the smartest guy in the business dept of any school. Math profs at U of C make less than entry level analyst at United. No one at United has IQ greater than 2 sigma.}
( ii ) You are way ahead of your time. Bachelier, wrote most of the option pricing theory in 1800. Didnt make a penny.


Goutham said...

If sigma was really 30, then 0 to 100+2sigma covers almost the entire population. While I agree that income will go up with increase in IQ, I don't agree that it is a linear increase. There has to be a point where it is flat (maybe until an IQ of 80), then a linear increase (to 110) and finally an exponential increase (until 150). Over 150, I agree that the income will actually come down.

Either way, the point that Ram is highlighting, I guess, is still valid. While income follows the above relation, net-worth and wealth dont. I think the simple reason for this is that people make different lifestyle choices and these choices are independent of their IQ. For example, there might be people across the IQ spectrum who like to live life by the day and spend everything they earn. These people will all have close to zero net-worth (assuming a person is capable of instantly spending everything he earns; not such a bad assumption.) and therefore spoil the correlation. Now, I don't want anyone to question these people's IQ for not being "savvy" with their money. It's after all their choice.