Nassim Taleb is Possibly Wrong about Wealth and IQ

Taleb is going on again about how there is no statistical correlation between wealth and IQ:

Wow…a screenshot of a PDF pre-print. How convincing. He’s not even bothering to link to the actual report, but rather assumes we’ll take his word for it.

For context, here is Taleb’s original argument, from his hugely viral January 2019 blog post IQ is largely a pseudoscientific swindle:

There is no significant statistical association between IQ and hard measures such as wealth. Most “achievements” linked to IQ are measured in circular stuff s.a. bureaucratic or academic success, things for test takers and salary earners in structured jobs that resemble the tests. Wealth may not mean success but it is the only “hard” number, not some discrete score of achievements. You can buy food with a $30, not with other “successes” s.a. rank, social prominence, or having had a selfie with the Queen.

and he continues…

But the “intelligence” in IQ is determined by academic psychologists (no geniuses) like the “paper trading” we mentioned above, via statistical constructs s.a. correlation that I show here (see Fig. 1) that they patently don’t understand. It does correlate to very negative performance (as it was initially designed to detect learning special needs) but then any measure would work there. A measure that works in the left tail not the right tail (IQ decorrelates as it goes higher) is problematic. We have gotten similar results since the famous Terman longitudinal study, even with massaged data for later studies. To get the point, consider that if someone has mental needs, there will be 100% correlation between performance and IQ tests. But the performance doesn’t correlate as well at higher levels, though, unaware of the effect of the nonlinearity, the psychologists will think it does.(The statistical spin, as a marketing argument, is that a person with an IQ of 70 cannot prove theorems, which is obvious for a measure of unintelligence — but they fail to reveal how many IQs of 150 are doing menial jobs. So “vey low IQ” may provide information, while “very high IQ” may convey nothing better than random — it is not even a necessary condition.).

As I discuss earlier, one must account for individual preferences when studying the link between wealth and IQ. For example, a high-IQ person who aspires to be in theater or to be a writer probably has different preferences as it pertains to the accumulation of wealth than a high-IQ person who works in STEM, law, or as an investment banker. A person who possesses an average IQ and who aspires to make wealth, has much more limited career options that don’t pay as well, such as service sector work or construction, compared to high-IQ people, who have much better-paying choices such as legal, healthcare, banking, STEM, etc. You cannot compare a high-IQ person who has low individual preferences for making money to an average-IQ person who does. If you do, then obviously, the correlation between wealth and IQ is not going to be as strong.

And as Jonatan Pallesen points out in his excellent article Taleb is wrong about IQ:

The probability if there was 0 correlation is of course 0.5. So using IQ as a criteria beats random selection by 16.67% (as Taleb also found). This is a little more than 6%, but that is a detail. More importantly, this example is a theoretical use case where using IQ testing is not so useful. To look at something a little more realistic, let’s say a company wants to avoid people with a performance more than 2 standard deviations below the mean. (Perhaps such employees have a risk of causing large harm, which could for instance be an issue in the military.) And we again compare admitting people at random vs only taking applicants with above average IQ.

So although having a high IQ, at the individual level, is not of high predictive value of having a good-paying, high-IQ job (due to preferences as discussed above, among other factors), such jobs are almost filled by high-IQ people. Not all high-IQ people know how to code, but it’s almost exclusively high-IQ people who get coding jobs, because they are smart enough to learn the skill.

IQ is also important for determining one’s relative success among one’s peers for g-loaded activities, whether it’s writing ability, chess ability, math ability, etc., but also wealth-making ability. When someone aspires to do “X” for a living or to be good at something as a hobby, ideally they want to be among the best of their peers. If someone wants to make a career out of writing, they will be at a disadvantage against writers who have superior verbal IQs. Someone who wants to code is at a disadvantage if their working memory is so poor that they cannot remember the commands. Stock and option trading success is largely a function of understanding patterns and trends. Among option traders on /r/wallstreetbets, the most successful traders have markers (because we don’t have access to actual IQ scores, the best option we have are proxies such as writing ability, educational attainment, choice of major, standardized test scores, etc.) indicative of high IQ. That’s not to say all high-IQ traders are successful, but almost all successful traders have high IQs. This is demonstrated by studies that show that money managers that come from prestigious schools predictive of high IQ out-perform less intelligent managers, even when controlling for variables such as fund size.

Studying popular subs such as /r/wallstreetbets, /r/investing, /r/personalfinance, /r/fatfire, and /r/financialindependence is useful because we have a generally homogeneous population in which everyone tends to have similar individual preferences, that being the accumulation of wealth, so we have already controlled for that important variable. To a high degree of statistical significance, regarding the aforementioned subs, members who accumulate a lot of money at an early stage in life such as through investing and or STEM, again, tend to high high IQs. Even inheriting a lot wealth at an early age is positively correlated with IQ, because of the correlation between between family wealth and IQ.

Another problem is that wealth vs. IQ studies use old data, but economic conditions have changed dramatically since then, both in terms of new job and investment opportunities for high-IQ people, that decades ago didn’t exist or were not as lucrative. The study that Taleb defers to, Zagorsky 2007, follows “young baby boomers 21 times between 1979 and 2004,” but recent economic conditions have, in my opinion, strengthened the link between wealth and IQ.

Over the past decade, thanks to low interest rates, a strong housing market, the web 2.0 tech boom in Silicon Valley, and the biggest and longest bull market and economic expansion ever, the correlation between wealth and IQ is probably stronger than ever, as high-IQ people have access to lucrative investment opportunities and careers that a generation ago didn’t exist, and are able to rapidly compound wealth through these investments, that is further magnified by a backdrop of low inflation. Look at all the teens and young people making money on social media and in coding, whereas 20 years ago such jobs either didn’t exist didn’t pay as well on an inflation-adjusted basis, or were much more limited. For example, the financial tech industry, which has been booming since 2009, relies heavily on coding and pays well. There’s huge demand for coders, and overall, people with strong analytical ability, to analyse and backtest investment and asset allocation strategies. It’s not just STEM. Even writers are making more, too, in terms of lucrative 6 and 7-figure book deals and Amazon sales. Even as a recently a decade ago, Amazon was not an option for up-and-coming authors.

Moreover, the income gap between college grads and non-grads is the widest it’s ever been, and has widened especially since 2009:

In spite of increased student loan debt, grads come out way ahead over a lifetime in terms of lifetime earnings than non-grads. Of course earnings and wealth are not the same thing, but someone who earns a lot of money and is frugal will accumulate wealth faster than someone who goes from one dead-end job to another and barely has enough to live off of, let alone invest with.

Today’s investors have many more options to invest and grow their wealth, compared to generations ago, such as low-cost index funds, 401ks, roth IRAs, etc. Mortgage rates are so low today, at just 3-4% for 15-30-year mortgage, compared to the double-digits rates ’70s and ’80s, which makes it easier for high-income, high-IQ borrowers with good credit to leverage and accumulate compounded wealth with real estate. And not having to rent helps, too, as the cost rent has far exceeded inflation since 2009.

Overall, the fallacy in Taleb’s reasoning is he assumes that everyone is put in the same box regardless of IQ or individual preferences, and outcomes are determined randomly, when that is not the case. People not only have different preferences but are also competing with each other.