IQ and wealth: The dumb rich and the smart poor

The following is a guest blog post by Joel Schneider (Clinical psychologist, Illinois State University), a member of IQs Corner Virtual Community of Scholars project.

The Dumb Rich and the Smart Poor

or

I Am as Tall as the Rocky Mountains!

(After controlling for barometric pressure)

• Zagorsky, J. L. (in press). Do you have to be smart to be rich? The impact of IQ on wealth, income and financial distress. To appear in Intelligence. (click here to view)

Abstract

How important is intelligence to financial success? Using the NLSY79, which tracks a large group of young U.S. baby boomers, this research shows that each point increase in IQ test scores raises income by between $234 and $616 per year after holding a variety of factors constant. Regression results suggest no statistically distinguishable relationship between IQ scores and wealth. Financial distress, such as problems paying bills, going bankrupt or reaching credit card limits, is related to IQ scores not linearly but instead in a quadratic relationship. This means higher IQ scores sometimes increase the probability of being in financial difficulty.

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If you’ve ever been around very wealthy people, you might have noticed that they generally feel that it is in poor taste to be too concerned about money. Poor people, on the other hand, don’t have the luxury of not focusing on the importance of money. In much the same way as wealthy people think about money, smart people such as bloggers, journalists, and their typical readers generally find it distasteful to believe in the importance of intelligence and often delight in research that shows that IQ tests are irrelevant.

Now we have a study that can make both smart and rich people feel good. News reports of this article by Jay Zagorsky claim that IQ doesn’t matter when it comes to amassing wealth. Smart rich people can react to the article by thinking, “Yes, of course. It is not that I have special gifts for which I cannot take credit. No, I am rich because I earned it. Anyone can do the same. Poor people could be rich if they would only do what I did. It must be that I am a morally superior person.” People without a lot of money might be tempted to conclude, “This explains why there are so many rich idiots.” Viewed the right way, there is something in this study for everyone.

Unfortunately, the news reports about this study have oversimplified the study to the point of gross misinterpretation. The journalists cannot be blamed for the oversimplification, however. Indeed, the abstract of the article has the (entirely correct but confusing) words, “Regression results suggest no statistically distinguishable relationship between IQ scores and wealth.”

But what does this mean? It certainly sounds like IQ and wealth have no causal connection. However, as the title of this post suggests, regression results can be horribly misleading when we address issues of causality. People who remember the adage “correlation does not imply causation” might not happen to know that regression analysis is like correlation on steroids. At its core, regression is essentially the same thing as correlation and therefore it has the same weaknesses as correlation when it comes to helping us know what causes what.

Just because I can use regression to show that the houses in my neighborhood are just as tall as the Rocky Mountains after statistically controlling for barometric pressure at the summits of each house and mountain does not mean that I have proved that there is no true difference in the heights of houses and mountains. It also doesn’t prove that houses and mountains would be the same height if we were to equalize the barometric pressure differences. We know that such an analysis is stupid because we know that changing altitude causes air pressure to change and that changing air pressure has no effect on altitude.

So what exactly does the study say? First, it distinguishes between income and wealth (net worth). It is possible to amass a fortune by being frugal with a small income and it is possible to spend oneself into bankruptcy even with a high income. The article confirms that the relationship between IQ and income is, although rather modest (r = .297), statistically robust. Squaring the correlation suggests that IQ explains “only” 9% of the variance in income. This leaves 91% of the variance in personal income to be explained by other factors. The correlation of IQ and wealth is only half as large (r = .156) and accounts for a mere 2.4% of the variance in wealth. This means that a person’s net worth is determined largely by things other than IQ.

So now we can stick out our tongues, put our thumbs in our ears, wiggle our fingers, and sing, “NAH, nah, nuh, NAH, nuh!” to all our smarty-pants rivals in high school who thought they were SO smart. IQ is so insignificant. It explains only 2.4% of the variance in wealth!

…But wait, what does this look like graphically? Taking the data from Table 2 of the Jagorsky article and plotting the relationships of IQ with net worth on the left axis and income on right axis, you get a graph like the one at the top of this blog post (see above)

Yes, the low correlation between IQ and wealth does, in fact, mean that low IQ does not doom a person to poverty and that high IQ does not guarantee wealth. However, the difference between the median net worth of the lowest IQ category ($5,775) and that of the highest ($133,250) is hardly trivial. To make an analogy, your basketball skills wouldn’t be that much better if you grew an extra inch. However, to claim that height is irrelevant in basketball is utter nonsense.

The Jagorsky article is not claiming that there is no relationship between wealth and IQ. It does, however, claim that this relationship disappears after controlling for a number of sensibly selected variables such as age, marital status, education, race, inherited wealth, and so forth. If these variables were uncorrelated with IQ, the interpretation of this finding would be straightforward. Unfortunately, many of these variables are robustly correlated with IQ and this makes the interpretation of the findings rather difficult.

Now, not even the most naïve and enthusiastic “IQ Believer” would argue that IQ has an unmediated relationship with wealth. That is, no one believes that wealth is a direct consequence of IQ (“The test results are in and you scored quite high. Here is your check!”). IQ, if it has a causal connection with wealth at all, must act through one or more other variables. For example, high IQ may give some people a distinct advantage in acquiring more education. Many high paying jobs (e.g., jobs in the fields of law and medicine) use educational degrees as credentialing mechanisms. Thus, in this case, the proximal cause of higher income is the acquisition of educational credentials but IQ would still be an important distal cause.

Thus, when Jagorsky writes that the relationship between IQ and wealth disappears after controlling for a particular set of variables, it is essentially a claim to have identified which variables are likely to mediate the effect of IQ on wealth. What is unresolved is whether IQ really is a cause of variables such as educational attainment or simply a meaningless byproduct of education. Unfortunately, regression analyses alone cannot distinguish between the 2 causal models visually represented by a path diagram figure (click here). For that, we need other sources of information.

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