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Laura Rowley Money & Happiness

Laura Rowley, Money & Happiness

Why Smart People Make Bad Financial Moves

by Laura Rowley

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Posted on Thursday, May 3, 2007, 12:00AM

Smart people can be boneheads when it comes to accumulating wealth, and the average Joe can become the millionaire next door.

That's the finding of a study by Jay Zagorsky, a research scientist at the Ohio State University, who examined the relationship between IQ and wealth.

Intelligence Doesn't Ensure Wealth

While Mensa members score bigger paychecks, they aren't more likely than average folk to transform their take-home pay into wealth. "Smarter people tend to get paid more on the job, but there's no relationship between intelligence and net worth when holding other factors constant," says Zagorsky, whose report was published in the journal Intelligence.

The research looks at a group of about 7,500 baby boomers who have been repeatedly interviewed since their teens as part of the government's National Longitudinal Survey of Youth. Back in the 1980s, the Department of Defense asked the group to take its general aptitude test so it could compare military recruits' scores with the general population.

Twenty-five years later, Zagorsky asked the same people about their income, net worth (the difference between assets and liabilities), and financial difficulties such as maxing out credit cards, missing bill payments, or declaring bankruptcy.

Financial Mistakes Have No IQ

Zagorsky found that each point increase in IQ test scores raised income by between $234 and $616 per year. Thus someone with an IQ of 120, ranking in the top 10 percent of IQ distribution, would make $4,680 to $12,320 more than someone with an average score of 100.

But their superior minds and salaries didn't give them greater net worth -- or shield them from financial woes. Among people with an IQ of 120 or above, more than 6 percent maxed out credit cards; almost 12 percent missed a payment in the past five years; and 9 percent declared bankruptcy.

"Those are significant numbers of very intelligent people who don't have control over their finances," says Zagorsky. "If you're not in the top 5 or 10 percent, it's comforting to know there are really intelligent people making mistakes, too."

Average Millionaires

The Army's IQ test is a conservative instrument that assesses reading ability, comprehension, and math skills. It doesn't measure the other kinds of intelligence outlined by Dr. Howard Gardner of Harvard University back in 1983, nor does it account for the personality traits that can lead to big bucks.

Here are a few theories on how people with average IQ scores end up rich:

• They make their own rules.

"Many wealthy people didn't do well in school; it was too structured for them," says Loral Langemeier, author of "The Millionaire Maker" and chief executive of Live Out Loud, which conducts wealth-building educational seminars. "But they're creative, intuitive, and have street smarts -- they understand how things work, and how to get business done."

Many are entrepreneurs. The net worth of self-employed people in the survey was $11,000 to $17,000 more than people who worked for others, Zagorsky found.

• They get knocked down, but they get up again.

"It's hustle," says Barbara Corcoran, who built New York City's largest residential real estate company over three decades, before selling the Corcoran Group for $66 million in 2005.

"Hustle is being too stupid to know that you should lay low when you keep getting slammed," says Corcoran, who describes herself as a "terrible" student. "It's 'hit me again, hit me again, hit me again.' Of the truly wealthy entrepreneurs I've met, the number-one trait they had was hustle."

• They succeed through social intelligence.

Jacques Demers coached the Montreal Canadiens to the Stanley Cup in 1993 and later became a general manager in the National Hockey League. During the entire time he was unable to read or write, according to his 2005 biography "En Toutes Lettres."

Demers' father was an abusive alcoholic who beat his son for poor grades, so he left school at 16 functionally illiterate. If someone asked Demers to read something, he would say his English was poor; if the document was in French, he would say he'd been in the U.S. for too long. If all else failed, he would say he forgot his glasses.

Demers talked his way into a license, a job, a green card, and an executive position in his nation's most popular sport. He surrounded himself with a team that compensated for his weaknesses. When he became a general manager, for instance, he hired two associates to handle contracts and give him verbal summaries.

Finally, in his 50s, Demers came clean; he worked through his childhood issues with a psychologist and overcame his illiteracy. "I wanted my head to be free," Demers told one sports columnist. "Now I'm free. I'm happy."

• They may take more risks, and consequently reap more rewards.

People with average brains may be more naive and willing to jump in -- start a business or make an investment -- than their high-IQ counterparts, who ponder every angle and know too much about the potential downsides of a proposition to take a risk.

Zagorsky is currently working on a study that will look at risk-tolerance among his survey subjects.

Smart People, Dumb Moves

In the meantime, I have a few theories on why people with high IQ scores end up struggling financially:

• Sometimes a really bright person develops a gigantic sense of entitlement.

This phenomenon can be described in two words: Dennis Kozlowski.

Back in 2001, the former chairman of Tyco International told BusinessWeek magazine that he preferred managers who are "smart, poor, and want to be rich" -- like him, a kid from a working-class neighborhood in Newark, N.J.

Kozlowski is currently serving up to 25 years in prison and must pay millions in fines after being convicted of stealing more than $100 million from Tyco.

• They think they'll find "the big idea" that others overlook.

Samuel Clemens never took an IQ test, but he was smart enough to write the "Adventures of Huckleberry Finn" and earn $100,000 a year in the 1800s, when a middle-class salary was $1,200. Clemens still went bust in 1894, according to Charles Gold, author of "'Hatching Ruin,' or Mark Twain's Road to Bankruptcy."

"He had the reverse of the Midas touch," says Gold. Clemens invested thousands of dollars in ideas that never made money: a temperamental typesetting machine; a pair of sheers used to cut grapevines; a clamp that kept the bedclothes from sliding off a child's crib; and a children's history game that taught the dates of major events (the latter being merely bad timing, as the idea took off a century later as Trivial Pursuit).

• They may run with a fast crowd and live beyond their means.

Clemens' investing misadventures were compounded by his appetite for luxury. "He had rich tastes; it took a staff of 12 people to run his house in Hartford, Connecticut," says Gold. "He traveled by private rail car. He was pals with Andrew Carnegie and Henry Rodgers of Standard Oil. He knew and called on the president. He moved in that elevated circle."

After bankruptcy, Clemens launched a global lecture tour and eventually paid back every penny to his creditors. But he never found the wealth he sought.

"He was always looking for the big investment that would earn him so much money he would never have to write again," says Gold. Fortunately for his fans, he never found it.

For a look at other factors Zagorsky has identified that influence wealth, see my blog.

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  • Sreeram - Friday, May 18, 2007, 2:48PM ET  Report Abuse

    • Overall: 5/5

    My personal experience is that having high intelligence does not help you much if you work for a company. You end up being given all the difficult projects and spending too much time at work, all you are doing is helping other get rich. Also getting ahead at work is more about politics than performance. IQ with little bit of politics helps make higher salary. But higher salary does not make you rich. Success Business and good investments make you rich. And that requires people skills(understand their emotions) and market skills. Look at Bill Gates and Waren Buffet. Look at John D. Rockefeller and Henry Ford. Look at Duribai Ambani and Laxmi Mittal. What skills do they have and you don't? You don't(cannot be) like them. But you can build your own success path.

  • May - Friday, May 18, 2007, 2:11PM ET  Report Abuse

    • Overall: 3/5

    It's pretty apparent that book smarts is very different from street smarts. But it's interesting to see the numbers and stats that support that. In reference to the previoius comment postedby a Yahoo Finance User, it seems like he/she is arguing the very same points made by Zagorsky and doesnt realize it. It's all in how you want to define "intelligence" but technically speacking "IQ" does stand for "intelligence quotient." So yes, people can be "intelligent" in very different ways, but for study/statistical purposes, the only way to give them quantative figures is to use "IQ" scores to define intelligence. And the point of studies is to show what the norm or average is, so arguing individual cases that prove otherwise is a rather mute point.

  • Yahoo! Finance User - Friday, May 18, 2007, 12:48PM ET  Report Abuse

    • Overall: 1/5

    Not a bad article, but it lists common-sense ideas (don't invest in crap and don't blow your money all at once on garbage) and uses this ridiculous study, which basically bashes smart people, for its base. Since when is the DOD test a study of intelligence? I don't think MENSA uses it, and I know for sure that it is not used for testing school-aged kids. Also, a person's IQ isn't necessarily high in all areas, which means that someone may be able to quote Chaucer at will (in Middle English) and effectively analyze each line, but that doesn't mean they're good with money, or even math. Being a genius doesn't mean that you're good at EVERYTHING (I mean, really, they're not all olympic gold medalist math genius billionaires), or that a genius would even do well in school (many don't)! Also, there are many other factors involved in the scores on the DOD test (as in all IQ tests!): environmental factors like education, social class, parents in the home and more (which explains why many low-income participants were excluded from the final scoring). And although many of those millionaires may have scored "okay" to "low" on the test, they are probably geniuses in some other way. Be careful not to equate formal education with intelligence; I've known high-school dropouts that are successful and prolific writers (and geniuses); I've known people with doctorates that could barely function in society. I even know of a person who was a Rhodes scholar who is now homeless. Most, if not all of your financial success, as well as success in your whole life, lies in your personality, self-control, and good instincts, but dumb people don't become millionaires. Unless you're a criminal, you can't be an anti-social jerk who blows every paycheck at happy hour and expect to become a millionaire. Just a guess, but I'd bet Zagorsky didn't test Warren Buffett or Steve Jobs or Bill Gates.

  • TimP - Friday, May 18, 2007, 12:37PM ET  Report Abuse

    • Overall: 1/5

    You had a good idea for a story but missed the point. It doesn't take a genius to live within their means and put money into sensible investments.

  • maciel - Tuesday, May 8, 2007, 12:06AM ET  Report Abuse

    • Overall: 5/5

    I can't help but find the article useful. I'm a writer and makes 6 times more than the average pay a month. But I've been boggled down by bad financial investments and decisions since I started, right now I'm into paying depts even when I'm not even a spendrift. this article is an eye-opener for blinds like me.

  • Yahoo! Finance User - Tuesday, May 8, 2007, 12:04AM ET  Report Abuse

    • Overall: 2/5

    oh joy, it's great to know people with average IQ will be better off... that's greeeat...

  • stacg59 - Tuesday, May 8, 2007, 12:01AM ET  Report Abuse

    • Overall: 5/5

    Hit the nail right on the head. My father is street smart business man who has only a high school education (barely). He is a self made millionaire. I trust his opinon on business matters more than some other highly educated financial people. Hustle is always his answer and never give up.

  • Yahoo! Finance User - Monday, May 7, 2007, 11:57PM ET  Report Abuse

    • Overall: 1/5

    Their are many factors in gaining wealth. Luck and timing are the main ones. It has nothing to do with being smart or being mediocre. The ones who write all these articles and books make millions off naive and vulnerable people who buy into their garbage notions. If you don't make much, don't spend much! If you make a lot, save a lot! That's how you gain wealth.

  • Woody - Monday, May 7, 2007, 11:56PM ET  Report Abuse

    • Overall: 5/5

    Great article. Go to author's blog, it has much more interesting information.

  • AndrewW - Monday, May 7, 2007, 11:56PM ET  Report Abuse

    • Overall: 1/5

    There go the dreams of a 16 year old with a high IQ. I guess I won't be rich. Whatever.

  • wasup7up - Monday, May 7, 2007, 11:44PM ET  Report Abuse

    • Overall: 5/5

    you said it!

  • Boniface - Monday, May 7, 2007, 11:39PM ET  Report Abuse

    • Overall: 5/5

    i think the report is soo accurate

  • N N - Monday, May 7, 2007, 11:22PM ET  Report Abuse

    • Overall: 1/5

    lol, american journalists are realy stupid, the most foolish story ever seen

  • Yahoo! Finance User - Monday, May 7, 2007, 11:22PM ET  Report Abuse

    • Overall: 3/5

    I'm not sure what my IQ is, although I did get a perfect score on the DOD test that was referred to in this article. Regardless, I have been rich and I have been poor. After high school I built a multi-million dollar business, and then lost everything. After living in a barn with no heat or power for a year, I went to college and got a professional degree. I now live a middle class lifestyle. One thing I learned from my past is that being wealthy doesn't make you happy. Most of my darkest days were when I had alot of money. It was like a drug, and no matter how much I had, all I wanted was more. Nothing else mattered, not my family or my friends. I tried to justify by saying I was making a better life for my family, but it was all a lie. I simply craved wealth and power for my own selfish ego. After hitting rock bottom and working my way through college, I realized that I was generally much happier, even with out the money. Now I live life to enjoy my family and friends, and I am incredibly happy. I've learned to be happy with what I have. Money will never make you happy.

  • Yahoo! Finance User - Monday, May 7, 2007, 11:20PM ET  Report Abuse

    • Overall: 1/5

    "Average" people constantly feel the need to prove their self-worth; that's where their drive comes from. They feel inferior to those with book smarts, so they have to outdo them every time. It's a petty competition, if you ask me.

  • B - Monday, May 7, 2007, 10:58PM ET  Report Abuse

    • Overall: 5/5

    this article is a great representation of the public if you ask me. some user comments are confusing though. they talk about needing God to be happy and not needing money. I'm a born-again Christian and I know that I can not go through live w/o God, but I also re-read the article and didn't see anything to do with happiness in the article. the article simply talks about intelligence vs wealth. you can be happy as a millionaire or as broke as you want to be. you are correct there. but back to the article...i grew up book smart and quite naive...never street smart. but as i've gotten older, my street sense has increased dramatically. i am in a situation now where i have an opportunity to build wealth and i'm on my way. but the people that are showing me were not the ones that i was competing with in college or even High School for that matter. they weren't book smart, but they are some of the hardest workers that i know and most of them are filled with the highest integrity. doing the right thing and working hard are two traits that are tough to teach. Jesus taught that the path to greatness is through serving others. so i believe that if you focus on serving others ethically, you will not only be able to make money, but your rewards will be unfathomable. on another note, i noticed that before I accepted Christ, i felt like i deseved the best just because of my education and accomplishments. i had a chip on my shoulder. i didn't realize it at the time, but i put myself on a pedestal above others and thought that i was better than some of the work that others did. i was SOOO wrong it wasn't funny. and my life has changed dramatically since. so i can relate first hand to the words written above. thanks for the read...i would have to agree with it :)

  • akshaya i - Monday, May 7, 2007, 10:57PM ET  Report Abuse

    • Overall: 5/5

    This article is the need of the hour. One thing I can surely specify that people with avereage and high average IQ is generally achieving high success in their life, this is because they keep on trying to achieve their goals. Average and high average people are more tireless in intelligently. they likes to take intentionally more risks, which leads them to success. Most of the company's CEOs are average or high average in their IQ. But probably their subordinates may have high IQ. They became exhausted when high pression puton them, where as an average CEO have all the ability to face the consequences and achieve success in final game. Average IQ people are hard working, this leads excellent in their life.

  • WesS - Monday, May 7, 2007, 10:52PM ET  Report Abuse

    • Overall: 4/5

    My IQ has been measured between 173 and 179 (yes, your IQ does change over time), but I feel strongly that attaching any true importance to this number - in terms of believing that this alone will help you succeed in life - is so shortsighted as to be laughable. It may open doors yes, but the truly successful people I have personally known - businesspeople, elite sportspeople, people in happy relationships - all share in common traits other than a high IQ. To me, you need to be focused, committed, willing to openly and honestly critically evaluate and subsequently improve yourself and the situations you find yourself in, and above all you need to determine what it is that brings you happiness and strive to achieve it relentlessly. I have single-handedly built a million dollar business, competed internationally in elite sporting events, been nominated for a Rhodes scholarship, have several university degrees, am a loving father, the list could go on, but I have found that happiness isn't attached to any one of these. Happiness for me is keeping a balanced and continuously self-reflective check on myself, how others interact with me, and the example I feel I set in everything I do. It's a shame that many of the people discussed in this article seem to fall short of this in their pursuit of wealth, whether it's because they were greedy, ignorant or out of tune with their own egos. It's a sad fact that no IQ test has been designed to capture these all too common human shortcomings, and until there is such a test, these numbers will continue to be both worthless and meaningless.

  • Yahoo! Finance User - Monday, May 7, 2007, 10:47PM ET  Report Abuse

    • Overall: 4/5

    A smart person would actually realize that money isnt everything. They just know they can get that extra money when and if they want it because they can look for jobs that pay more but they still have qualifications to make that job. It depends all on how the indiviual is raised. Personal experience is better than being taught by a finiancial advisor because in the end we think he/she is wrong and go against it.

  • Rebecca - Monday, May 7, 2007, 10:44PM ET  Report Abuse

    • Overall: 3/5

    It doesn't take a smart person to know that credit cards can get you into trouble fast if you don't use them the way they are suppose to be used. You could be part of the percentage of people in debt if not used correctly. "USE CREDIT CARDS LIKE MONEY... IF YOU DON'T HAVE THE MONEY ... DON'T SPEND IT" my dad has always said. (whom is in credit card debt of thousands of dollars... go figure right?) I'm a 25 year old female who has been married for 7 years. I'm in business for myself, own my own house and the only debt we have is a mortage & a automobile payment. I DO NOT have one credit card because I know that I nor my husband is responisble enough to use them responsibly. My theory is save a little, play a little. NOT... Play a little, save later.

  • Yahoo! Finance User - Monday, May 7, 2007, 10:39PM ET  Report Abuse

    • Overall: 2/5

    I don't know what my IQ is and I don't care. I never went to college but I still make enough money to pay my bills and take care of my child. God has provided me everything I need and I am happier than anyone who has more money than me. Money does not provide happiness-nothing in this world does. The truly smart people of the world have found contenment with God and they know they need nothing else.

  • Sylvia - Monday, May 7, 2007, 10:38PM ET  Report Abuse

    • Overall: 2/5

    I can not say I agree or disagree with this one. I read the article for clarity...I did not get it. I'm just a smart , foolish risk taker.

  • Yahoo! Finance User - Monday, May 7, 2007, 8:25PM ET  Report Abuse

    • Overall: 2/5

    I have an IQ of 140 and am not successful only because of my motivation. The reason why truly smart people dont make so much money is that they are smart enough to know that they dont need it to be happy. A truly smart person will be content with what they have and be able to enjoy life no matter what. They know what they want and that if they want they can attain it. You dont need money to enjoy life and a smart person can enjoy life no matter what. Less smart people often need money or good grades or whatever else to feel good about themselves. If you are truly smart then you dont need anything to feel good about yourself, thus the lack of motivation.

  • Joseph - Monday, May 7, 2007, 12:49PM ET  Report Abuse

    • Overall: 2/5

    Wow...Another long drawn out article that explains the obvious. If it were not for some of the few insightful "little known" history tidbits thrown in, I would have been convinced that this was a larger waste of my time reading than "What not to do when asking for a raise at work", which was posted a few weeks ago as a headline featured article.

  • jackquelinek - Monday, May 7, 2007, 9:22AM ET  Report Abuse

    • Overall: 5/5

    Finally an article that addresses all this. Jaques Demers was a great example! Thanks for this article, it really cleared up a lot of issues I am struggling with. When I look at my life I see a lot of extremes and never really understood why.

  • Yahoo! Finance User - Monday, May 7, 2007, 3:51AM ET  Report Abuse

    • Overall: 4/5

    So.... Foolish doesn't matter in wealth.....

  • Jessica - Monday, May 7, 2007, 3:33AM ET  Report Abuse

    • Overall: 3/5

    Oh, so the main point is - you should be a diligent person abled to plan your life wisely. Yeah, I always read these stuff and hear it from others...I guess I should try, but it's not easy to do so...

  • johnny mac or big daddy - Monday, May 7, 2007, 12:19AM ET  Report Abuse

    • Overall: 3/5

    I took the tickle IQ test and got a 138 (mostly conceptual and math not english or language). I worked with a lot of intelligent to very intelligent people (some not so intelligent including myself sometimes) and what I noticed is that a persons values, sense of self worth, background and even their relationships with other people all seem to be apart of it. I think when it comes down to it I think if a person is happy with the way thier life is going and are not worried about the future they tend not to save as much and aren't driven to save and plan. Bottom line it is not how much you make but your own values. After all we live in the good ole U. S. of A. and if you can't do it here it is because your not trying hard enough.

  • Yahoo! Finance User - Sunday, May 6, 2007, 11:51PM ET  Report Abuse

    • Overall: 5/5

    I found this article fascinating because when you look at the people who have acquired massive wealth you know they had to crawl before they walked. I am quite sure they had failure somewhere in their careers but look at what they have acquired today.

  • Arthur - Sunday, May 6, 2007, 10:28PM ET  Report Abuse

    • Overall: 4/5

    I somewhat agree with this article. I have an IQ of 133 and I do make alot of mistakes with the handling of my money. I have a habit of checking out every angel.

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