The Psy-Fi Blog examined how being smart can lead to investing mistakes: “Intelligence Can Seriously Damage Your Wealth.”
The first half of the piece discusses the results of an academic study showing how people who rate highest in SAT scores tended to rely on historical price performance to decide how to invest amongst an array of S&P 500 index funds. I was a bit stunned to read that these “smart people” did not just choose the index funds with the lowest fees. (I did not review the study’s statistics – often, these kinds of controlled experiments feature small study groups and tortured statistics to demonstrate the significance of the results).
Regardless, the study’s conclusions make for a fascinating read. I think the most accurate statement describing these results is the following:
“Of course, this study wasn’t using people with a particularly deep knowledge of the way markets work, so even though they were extremely intelligent this doesn’t clearly show that smarts don’t help in investing, only that untrained clever people don’t see clearly in the obscure investing universe.”
In other words, it is not really that being smart makes you dumb when it comes to investing. It is just that being dumb (ignorant) at investing will leave you vulnerable to whatever biases you bring to the table. Apparently, smart people have a bias for over-doing it when it comes to creating clever decision-making rules. Note well that the “less than smart” people did NOT consciously choose the funds with the lowest fees, they allocated their money equally across all funds.
(The second half of the blog examines the investing behavior of finance professors and finds that they are no different than the rest of us).
Be careful out there!
Full disclosure: no positions