A controversial study reported on by Robert J. Shiller has found a correlation between investment success and I.Q. The study accounted for factors like income and education, but still concluded that people with higher I.Q.s do better in the stock market.
Sharath Sury, Chairman for SIFIRM (the Sury Institute of Financial Innovation and Risk Management), can partially account for this. Essentially, the paper argues, people with high I.Q. scores are more likely to follow the rules of successful investing. Sharath Sury’s work with SIFIRM and as a professor of finance has been about teaching these habits to everyone, regardless of I.Q.
Sharath Sury’s tips for building one’s portfolio reflect many of the findings of the study. People with higher I.Q.s tend to diversify their investment portfolios more than those with lower scores and invest more heavily in the stock market.
High- I.Q.-scorers also choose small-capitalization stocks, which typically beat the broader market. People with high I.Q.s also favor companies with high book values relative to their share prices.
The results are that people with high I.Q.s build portfolios with better risk-return profiles. Sharath Sury’s background in behavioral finance has provided important insight into the psychological motivators that help (and hurt) personal finances. For example, he predicted that 2009’s economic stimulus would work, primarily because of its psychological effects.
“Consumer spending represents nearly 2/3 of GDP growth,” he observes. “Therefore, getting the consumer to have increased confidence in the economy and resume spending has been perhaps the most important part of ensuring US economic growth.”
The same principles can be applied to personal finance. Those unfamiliar with the financial markets on their own can entrust their money to professionals or seek professional advice.
Therefore, Sharath Sury has found, the problem with bad investors does not lie in their lack of ability. They are simply not as good at deciding who to trust with their money.
Distinguishing between those who are and aren’t trustworthy is an aspect of intelligence. The authors of the I.Q. study found that investment decisions use a part of the brain associated with the ability to make inferences about others’ preferences and beliefs.
Sharath Sury’s recognizes that recent economic upheaval has made it more difficult for Americans to trust financial professionals. However, Sury has also found that this trust is implicit in financial success not only for one’s personal portfolio, but also for the entire country.
Sharath Sury is the chairman for SIFIRM, bringing together the minds of scholars and practitioners in financial economics to address risk management, portfolio optimization, and behavioral finance. Sharath Sury also teaches finance, portfolio management, and investment theory at the University of California as a visiting scholar and adjunct professor of economics.