Why Smart People Make Bad Financial Moves

Smart people can be boneheads when it comes to accumulating wealth, and the average Joe can become the millionaire next door.

That's the finding of a study by Jay Zagorsky, a research scientist at the Ohio State University, who examined the relationship between IQ and wealth.

Intelligence Doesn't Ensure Wealth

While Mensa members score bigger paychecks, they aren't more likely than average folk to transform their take-home pay into wealth. "Smarter people tend to get paid more on the job, but there's no relationship between intelligence and net worth when holding other factors constant," says Zagorsky, whose report was published in the journal Intelligence.

The research looks at a group of about 7,500 baby boomers who have been repeatedly interviewed since their teens as part of the government's National Longitudinal Survey of Youth. Back in the 1980s, the Department of Defense asked the group to take its general aptitude test so it could compare military recruits' scores with the general population.

Twenty-five years later, Zagorsky asked the same people about their income, net worth (the difference between assets and liabilities), and financial difficulties such as maxing out credit cards, missing bill payments, or declaring bankruptcy.

Financial Mistakes Have No IQ

Zagorsky found that each point increase in IQ test scores raised income by between $234 and $616 per year. Thus someone with an IQ of 120, ranking in the top 10 percent of IQ distribution, would make $4,680 to $12,320 more than someone with an average score of 100.

But their superior minds and salaries didn't give them greater net worth -- or shield them from financial woes. Among people with an IQ of 120 or above, more than 6 percent maxed out credit cards; almost 12 percent missed a payment in the past five years; and 9 percent declared bankruptcy.

"Those are significant numbers of very intelligent people who don't have control over their finances," says Zagorsky. "If you're not in the top 5 or 10 percent, it's comforting to know there are really intelligent people making mistakes, too."

Average Millionaires

The Army's IQ test is a conservative instrument that assesses reading ability, comprehension, and math skills. It doesn't measure the other kinds of intelligence outlined by Dr. Howard Gardner of Harvard University back in 1983, nor does it account for the personality traits that can lead to big bucks.

Here are a few theories on how people with average IQ scores end up rich:

• They make their own rules.

"Many wealthy people didn't do well in school; it was too structured for them," says Loral Langemeier, author of "The Millionaire Maker" and chief executive of Live Out Loud, which conducts wealth-building educational seminars. "But they're creative, intuitive, and have street smarts -- they understand how things work, and how to get business done."

Many are entrepreneurs. The net worth of self-employed people in the survey was $11,000 to $17,000 more than people who worked for others, Zagorsky found.

• They get knocked down, but they get up again.

"It's hustle," says Barbara Corcoran, who built New York City's largest residential real estate company over three decades, before selling the Corcoran Group for $66 million in 2005.

"Hustle is being too stupid to know that you should lay low when you keep getting slammed," says Corcoran, who describes herself as a "terrible" student. "It's 'hit me again, hit me again, hit me again.' Of the truly wealthy entrepreneurs I've met, the number-one trait they had was hustle."

• They succeed through social intelligence.

Jacques Demers coached the Montreal Canadiens to the Stanley Cup in 1993 and later became a general manager in the National Hockey League. During the entire time he was unable to read or write, according to his 2005 biography "En Toutes Lettres."

Demers' father was an abusive alcoholic who beat his son for poor grades, so he left school at 16 functionally illiterate. If someone asked Demers to read something, he would say his English was poor; if the document was in French, he would say he'd been in the U.S. for too long. If all else failed, he would say he forgot his glasses.

Demers talked his way into a license, a job, a green card, and an executive position in his nation's most popular sport. He surrounded himself with a team that compensated for his weaknesses. When he became a general manager, for instance, he hired two associates to handle contracts and give him verbal summaries.

Finally, in his 50s, Demers came clean; he worked through his childhood issues with a psychologist and overcame his illiteracy. "I wanted my head to be free," Demers told one sports columnist. "Now I'm free. I'm happy."

• They may take more risks, and consequently reap more rewards.

People with average brains may be more naive and willing to jump in -- start a business or make an investment -- than their high-IQ counterparts, who ponder every angle and know too much about the potential downsides of a proposition to take a risk.

Zagorsky is currently working on a study that will look at risk-tolerance among his survey subjects.

Smart People, Dumb Moves

In the meantime, I have a few theories on why people with high IQ scores end up struggling financially:

• Sometimes a really bright person develops a gigantic sense of entitlement.

This phenomenon can be described in two words: Dennis Kozlowski.

Back in 2001, the former chairman of Tyco International told BusinessWeek magazine that he preferred managers who are "smart, poor, and want to be rich" -- like him, a kid from a working-class neighborhood in Newark, N.J.

Kozlowski is currently serving up to 25 years in prison and must pay millions in fines after being convicted of stealing more than $100 million from Tyco.

• They think they'll find "the big idea" that others overlook.

Samuel Clemens never took an IQ test, but he was smart enough to write the "Adventures of Huckleberry Finn" and earn $100,000 a year in the 1800s, when a middle-class salary was $1,200. Clemens still went bust in 1894, according to Charles Gold, author of "'Hatching Ruin,' or Mark Twain's Road to Bankruptcy."

"He had the reverse of the Midas touch," says Gold. Clemens invested thousands of dollars in ideas that never made money: a temperamental typesetting machine; a pair of sheers used to cut grapevines; a clamp that kept the bedclothes from sliding off a child's crib; and a children's history game that taught the dates of major events (the latter being merely bad timing, as the idea took off a century later as Trivial Pursuit).

• They may run with a fast crowd and live beyond their means.

Clemens' investing misadventures were compounded by his appetite for luxury. "He had rich tastes; it took a staff of 12 people to run his house in Hartford, Connecticut," says Gold. "He traveled by private rail car. He was pals with Andrew Carnegie and Henry Rodgers of Standard Oil. He knew and called on the president. He moved in that elevated circle."

After bankruptcy, Clemens launched a global lecture tour and eventually paid back every penny to his creditors. But he never found the wealth he sought.

"He was always looking for the big investment that would earn him so much money he would never have to write again," says Gold. Fortunately for his fans, he never found it.