Grinblatt, Keloharju and Linnainmaa somehow got the individual test results from all exams from 1982 through 2001 inclusive. And tied it to Finnish tax administration data, an address data set, the Finnish Central Securities Depository Registry (which has records on all Finnish households' portfolios and trades), and census data to measure the effect of IQ on stock market participation, controlling for education and income.
They find a nice monotonic relationship between IQ and stock market participation. The effect of being in the lowest ten percent of the IQ distribution is fifty percent larger than the effect of being in the lowest income decile. Running some decompositions of the independent effect of IQ as compared to wealth (because IQ can operate directly on participation and indirectly by influencing wealth creation which then also prompts participation), they find that IQ also works substantially through wealth, income and education; consequently, prior studies that included these as independent variables without including IQ overestimate the effect of those variables.
And, low IQ correlates with a more poorly diversified portfolio.
Finally, they then run some IV using a sibling's IQ as instrument, which then lets them also say something about female stock market participation.
I'm amazed they were able to get this dataset together. Individual level data combining IQ, income tax records and all stock market activity...fodder for a dozen more papers in there at least. They conclude:
Paradoxically, our finding that cognitive impairment leads to behavior that violates the principles of neoclassical economics helps justify recent neoclassical approaches to asset pricing theory. Neoclassically-inspired models that explain the equity risk premium puzzle from the consumption of stock market participants have been criticized for failing to explain what drives participation. For example, limited participation stemming from the costs of entering the stock market is either inconsistent with the pricing kernels of these models or represents a negligible fraction of wealth. Our finding that cognitive impairment prevents many of the wealthy from participating in the stock market renders these comments moot. Moreover, it suggests that the consumption of smarter individuals, rather than the wealthy, may be what drives the pricing kernel. This latter conclusion is not currently featured in formal neoclassical models of asset pricing. However, it is consistent with neoclassical folk wisdom—that economic behavior, divorced from utility optimization, is irrelevant for market efficiency because savvy investors determine asset prices.No way this paper lands outside the top tier.
HT: Wayne Marr's Twitter feed.