Daily Management Review

Research: IQ level affects economic literacy


People with relatively high intelligence, as measured by the IQ test, more accurately predict level of inflation, and their households better adapt to economic changes through a change in the balance of savings. This seemingly trivial conclusion of a group of economists, published in January by the Bank of Finland, was confirmed statistically for the first time in the world. This suggests that “innate economic literacy” correlating with IQ does not directly depend on the level of education, place of work and social environment. Besides, I states that the problem of over-indebtedness of poor households is at least partially related to cognitive abilities of credit card holders and consumers of consumer loans.

The article was published recently in the Working Papers series of the Bank of Finland, signed by several authors. In recent years, in collaboration with other specialists in behavioral economics, they have released several related papers, however, a direct attempt to link IQ and economic behavior through statistical data was undertaken for the first time.

There are many reasons for this: arrays of data on cognitive tests (IQ is a group of tests that determine a person’s cognitive abilities that are commonly associated with “intelligence”) can rarely be compared with data from economic surveys. In addition, this kind of work always looks suspicious from the point of view of the concepts of "social racism": this is somehow the search for confirmation or refutation of the thesis "why don’t you have money if you are so smart," - adjusted for the fact that there are thousands of works stating and social selection, linking IQ and access to education (and, consequently, higher paying jobs), and a low correlation between property parameters and the “IQ level” itself. Usually, it is practically impossible to show the connection between “economic rationality” and IQ. Now, however, a confluence of circumstances helped the researchers: the Finnish military tested all 20-year-old men drafted into the army, and the researchers had limited access to their anonymized data and were able to correctly compare them with the "inflationary" and other EU polls in Finland.

As a result, it is shown that men with higher IQ test data (higher than the median) statistically reliably predict expected inflation over the next 12 months or more, make less errors in such forecasts, are less prone to inadequate estimates of current inflation. They also react to the inflation dynamics in savings more confidently than the “lower half of the IQ group, and in general form households with a more rational balance of expenditures and incomes. The impact on the results of “social” factors (income, security, education, place of work) is less significant and does not cancel the conclusions: at least for men in Finland at the beginning of the 21st century, cognitive abilities made rational homo economicus of standard economic models from them.

The article discusses impact of findings on the mechanisms of the standard neo-Keynesian model of the balance of savings and spending (including inflationary expectations, which are more accurate with high IQ). The obvious (but not directly indicated in the work) conclusion of the study is the fact that effectiveness of neo-Keynesian models in a population with relatively low IQ should be higher. The authors as a whole are extremely correct both in this and in previous works with possible conclusions: it’s wrong to speak directly about “proof”, for example, the connection between low IQ and involvement in “credit holes”, but this is now a more reasonable hypothesis.

source: nber.org

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