A Wealth of Smarts Does Not Guarantee Actual Wealth

A new analysis of data from a long-term study shows that you don't have
to be smart to be wealthy


Just because you are smart doesn't mean you can balance a checkbook, or
tackle any of the other tasks that might make you wealthy. A detailed
study of 7,000-plus Americans followed since their teen years in the
late 1970s reveals that intelligence provides more earning power but not
necessarily more accumulated wealth. "The smarter you are, the more
income you have," explains economist Jay Zagorsky of Ohio State
University, who analyzed the data. "For wealth, there is no
relationship."
Zagorsky defines wealth as "the difference between a person's assets and
liabilities." So, wealth is income plus home value plus investments
(plus fun, valuable stuff like stamp collections) minus mortgages,
credit card debt and other debts. In 2004 a collection of 7,403
30-something baby boomers answered questions about their financial
status, including whether they had ever maxed out any of their credit
cards, fallen behind in bill payments or declared bankruptcy.
Roughly 9 percent of these folks reported credit cards charged to the
limit, 18 percent had missed at least one bill payment and more than 13
percent had filed for some form of bankruptcy. This same group also
participated in an IQ test in 1980 as part of their enrollment in the
National Longitudinal Survey of Youth. The Armed Services Vocational
Aptitude Battery consists of 10 tests, four of which-word knowledge,
paragraph comprehension, math knowledge and arithmetic reasoning-the
U.S. Department of Defense uses to assess the intelligence of recruits.
Zagorsky used these intelligence scores and compared them with financial
data collected in 2004. For each IQ point, there was a rise in income of
between $202 and $616 annually. (For example, a person with an IQ of 130
earns between $6,000 and $18,500 more per year than a peer of lesser
intelligence.) But this higher yearly income did not translate into
higher wealth. In fact, people with slightly above average intelligence
(105 IQ score) had an average net worth higher than those just a bit
smarter (110 IQ). "There are some very smart people who get into
financial difficulties," Zagorsky notes. "Even smart people don't save."
When Zagorsky controlled for variables like race, education, job status
and even factors like smoking, the gap between IQ and wealth remained
the same. "Why don't smart people do financially better is the next
question to answer," he says, adding that he is completing a follow-up
study examining the relationship between intelligence and saving rates.
And the probability of missing a payment actually increases with IQ
score, he notes.
Explanations are lacking, though Zagorsky speculates it could be
anything from people with higher IQs having a better memory for missed
payments or a predilection for financial risk, among other
possibilities. One thing is clear, however: most of the participants
showed financial savvy from an early age, agreeing to participate in the
armed forces test in exchange for $50.
The bottom line: "If you're an individual with relatively low
intelligence, you shouldn't really believe that you're handicapped in
achieving wealth," Zagorsky says. "Similarly, if you're intelligent, you
shouldn't think you have an advantage in living the rich life."

April 24, 2007
Scientific American.com