IQ and Stock Market Participation

By on January 25, 2011

The Journal of Finance has an interesting article regarding a study of stock market participation based on the Intelligence Quotient (IQ) of investors.  The article is 99 pages and this paragraph stands out in the first 10 pages.

IQ could influence participation if a subject’s risk-return trade-off is positively related to his IQ. Motivated by this conjecture, we document that IQ correlates with participants’ Sharpe ratios, controlling for the usual suspects, and trace this correlation to IQ-related differences in diversification and systematic risk. High-IQ participants are more likely to hold mutual funds, larger numbers of stocks, and have lower-beta portfolios than lower-IQ participants. High-IQ investors also have greater exposure to the risks of small and value stocks. These results lend credence to the story that high-IQ subjects participate because they face a superior risk-return trade-off and that low-IQ subjects shun participation because they make investment mistakes.

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