IQ and Stock Market Participation

Abstract

An individual's IQ stanine, measured early in adult life, is monotonically related to his stock market participation decision later in life. The high correlation between IQ and participation, which exists even among the 10% most affluent individuals, controls for wealth, income, and other demographic and occupational information. Supplemental data from siblings are used with both an instrumental variables approach and paired difference regressions to show that our results apply to both females and males, and that omitted familial and non-familial variables cannot account for our findings. IQ also is related to diversification. High IQ investors are more likely to hold mutual funds and larger numbers of stocks, other things equal.

The psychometric and empirical properties of measures of risk preferences

“…Viewed in this light, the fact that our measurement-error-adjusted estimates suggest a one-standard-deviation increase in cognitive ability is associated with up to a 0.3-standard-deviation increase in risk attitudes is remarkable. The association between IQ and risk attitudes is also consistent with the recent findings of Grinblatt et al (2011), who found that stock market participation increases with higher IQ. Further, the association is very significant for all risk variables, including Risk General and Risk Financial (which involve simple self-rated scales), thus suggesting the association is not only or primarily driven by the fact that measurement noise may be higher for individuals with lower cognitive ability (Andersson et al 2013).…”

Why Do (Some) Households Trade So Much?

“…This figure is within the estimate by Coval, Hirshleifer, and Shumway (2005), who find persistent superior performance among the investors in the top decile. This estimate is also within the bounds of Grinblatt, Keloharju, and Linnainmaa (2010), who find superior performance among the 4% of individuals who receive the highest score on an IQ test. These estimates must, however, be compared with some caution.…”

“…Performance heterogeneity. Studies by Barber et al (2005), Coval, Hirshleifer, and Shumway (2005), Bauer, Cosemans, and Eichholtz (2007), Goetzmann and Kumar (2008), Ivković, Sialm, and Weisbenner (2008), Nicolosi, Peng, and Zhu (2009), Grinblatt, Keloharju, and Linnainmaa (2010), and Seru, Shumway, and Stoffman (2010) find that a small number of individual investors outperform the market or their peers. Harris and Schultz (1998) show that some individual investors who use Nasdaq's Small Order Execution System for day trading are better than others.…”

Financial literacy, financial advice, and financial behavior

“…4.1), several contributions lacking an observable measure of financial capabilities exploit this evidence and use respondents' demographics in order to capture their financial literacy. Corresponding proxies for financial sophistication used in the literature include (disposable) income and wealth (Dhar and Zhu 2006;Vissing-Jorgensen 2003;Calvet et al 2007Calvet et al , 2009) as well as age (Calvet et al 2007(Calvet et al , 2009Georgarakos and Pasini 2011), educational attainment (Christiansen et al 2008;Calvet et al 2007Calvet et al , 2009), professional status (Calvet et al 2009), and even IQ (Grinblatt et al 2011(Grinblatt et al , 2012. Likewise, both Chalmers and Reuter (2012) and Hackethal et al (2012) use subsets of these demographics to proxy for financial literacy in their analyses.…”