(Bloomberg News) 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. 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 of Newport Beach, California-based Research Affiliates LLC. About $85 billion is managed using his firm's strategies. "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."
Military Records
Mark Grinblatt of the University of California, Los Angeles, Matti Keloharju of Aalto University in Espoo and Helsinki, Finland, and Juhani Linnainmaa at the University of Chicago compared results from intelligence tests given by the Finnish military between 1982 and 2001 to government records showing investments the draftees later held. They found the rate of stock ownership for people with the lowest scores trailed those with the highest even after adjusting for wealth, income, age and profession.
Three years after $37 trillion of global share value was erased in a 16-month bear market, not everyone considers limiting equity ownership to be a mistake. Nassim Nicholas Taleb, author of "The Black Swan," said in October 2010 that investors should sue the Swedish Central Bank for awarding Nobel Prizes to economists such as William Sharpe for theories that made it seem like stocks were safe. He declined to comment on the study.
'Really Saddened'
The Standard & Poor's 500 Index has gained 9.8 percent annually including dividends since 1926, compared with 5.7 percent for U.S. Treasury bonds, according to Ibbotson Associates, a research unit of Chicago-based Morningstar Inc.
Returns from the stock index have dwindled to about 0.6 percent a year since the end of 1999, and investors had two opportunities to sell after losing more than one-third of their money, in October 2002 and March 2009, data compiled by Bloomberg show.
"When I saw this paper, I was really, really saddened that it would actually get published," said Brian Jacobsen, who helps oversee $219 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin. "What they basically do is look at a very specific subset of the world's population and try to infer how this group of 19- and 20-year-old Finnish males did on a particular standardized test. To me, it really fails in the truth-in-advertising arena."