IQ vs. Income: Threshold Effects and Diminishing Returns

Richard Hanania weighs in on threshold effects of IQ as it pertains to income, such as in Sweden. The lowdown is that there are diminishing return to IQ vs income: beyond a certain threshold, like say an IQ of 130, the correlation breaks down. The highest of earners are not necessarily the smartest.

This can be explained by the fact that IQ exhibits a normal distribution. This implies that the tails are very thin. IQs above 170 are extraordinarily rare, and IQs above 200 do not exist (going by deviation scores, not ratio scores) . But the distribution for income is a power law and thus much more ‘fait tailed’.

IQ tests typically do not go above 135-140 or so (again, this is going by a ‘normal distribution’, not ratio or ‘mental age’ scores), but income is unlimited and easily quantifiable, hence the appearance of diminishing returns. For example, the AFQT, which is like an IQ test, maxes out at 99th-percentile. The thin-tailed properties of IQ makes creating a test which can discriminate between 1/100 vs 1/million intelligence, impractical (although attempts have been made). Also, such a test would have to be administered at scale, which is also not possible.

Not to mention, the inclusion of many high-paying professions, like the entertainment industry or professional sports, that does not necessitate a high IQ. But even if average-IQ people can become wealthy, like in sports, podcasting, or YouTube, there is a huge survivorship bias at play, which is less of a factor for more meritocratic professions like tech or finance. Moreover, obviously, not all high-IQ people aspire to the highest paying of professions (like being a writer or a professor instead of working at a hedge fund).

Almost every study that purports ceiling effects, diminishing returns to IQ, or low correlations between IQ and income, are based off of decades-old data and or ex-US data, like Sweden. This is because gathering data, analyzing it, and then the peer review process takes years. Eventually the paper is published, and decades later people still refer to it as somehow being a facsimile for the economy today as it was 30+ years ago. But the US economy and labor market is not some static thing fixed in time, but rather changes.

For example, in his 2017 post Against Individual IQ Worries, Scott shows a table purporting considerable IQ overlap between professions, with some high-paying professions having surprisingly low IQ cutoffs, like sub 100 IQ for an electrical engineer. I have seen this table shared on Quora, among many other sites. It’s popular because it tells people something they want to believe is true, which is that IQ is not that predictive of outcomes. But this table is based on 1981 data (of a single study with a sample size of 1,800 individuals). A lot has changed since then.

If anything, IQ has become way more important today than 30-40 years ago, especially for STEM jobs, like in Silicon valley, in which high incomes and high IQs go together. Higher salaries overall for all white collar jobs, even adjusting for student loan debt and inflation, will mean more competition and likely higher IQ thresholds for those jobs.

The labor market has gotten much more competitive, and more cognitive filtering filtering. A lot has changed, especially since 2008 and even more so post Covid. Nowadays, companies have much more ways of filtering out at the pre-employment stage, like background checks, automated resume filtering, credentialism (a big one), drug tests, personality tests, phone interviews, etc. These did not exist 30+ years ago, or at least not as often.

(Contrary to popular myth, IQ testing as it pertains to pre-employment screening is not illegal in the US. Proxies like the Wonderlic, which correlates with IQ and can be administered at scale, are legal and commonly used. Griggs only set a precedent for where it is illegal, not outlawing it, as sometimes mistakenly assumed. )

Going back to the original article, Mr. Hanania writes:

One thing I’ve noticed is that many smart people I know go into debt to become doctors or lawyers, or spend years chasing scarce academic or journalist jobs, when they could’ve just gone to work at Walmart after graduating from high school, worked their way up to local manager, and been financially better off. It seems that above a certain IQ threshold, and even at lower levels, people tend to feel entitled to what seem like higher status jobs, even if they pay less. A person with a 110 IQ might aspire to run a local business that makes a lot of money, while one at 125 might see something like that as beneath him and dream of doing investigative reporting. Sometimes this is based in idealism, other times it’s just desire for status and wanting to feel better than others.

There is a lot of truth to this that people will choose status in lieu of income/wealth. But it seems to work one-way, not the other. What I mean is, high-income successful people will take a downgrade of income for higher visibility (like hedge fund managers worth billions writing books), but not the other way around (authors who aspire to be hedge fund managers). For example, after retiring as a trader Nassim Taleb became an author, not the other way around. Or Michael Lewis, who in the ’80s worked at Salomon Brothers as a trader, but quit to become a financial journalist and author.