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What’s the Link Between Trust, High IQ and Investors?

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A recent Journal of Finance article suggests there’s a high correlation between IQ and participation in the stock market. Now, what does that mean?

Yale Economics Professor Robert Shiller explores the theme in a NYTimes column. He posits an interesting link between intelligence and trust.

The Smarts To Do What?

IQ tests are notorious for being good at measuring what IQ tests measure. What that is, is another question. But let’s stipulate that mathematical intelligence is somewhat correlated with IQ tests, and that intelligent investing requires more math than buying milk at the supermarket. That might explain why only half of American adults have money in the stock market.

But does it explain why higher-IQ people also seem to construct better-performing portfolios than do lower-IQ people? As Shiller points out, it’s not that high-IQ people are better stock-pickers – they just do a better job of following the basic rules of investing, namely diversify your risk.

But why should ‘rule-following’ correlate with IQ, anyway?

The Smarts to Trust

Shiller cites another study, this one from the Netherlands, that finds “those who indicated a high level of trust were 50 percent more likely to invest in the stock market.”

Further studies indicate low stock market participation may be the result of fear and suspicion – low trust prevents people who don’t understand the stock market from approaching those who do.  Namely investment advisors, brokers and the like.

Now the link gets clearer. It may not take a high IQ to understand diversification, but if you don’t trust the people who talk about diversification, you’re not going to learn about it.

Shiller makes another leap here that I’m not so sure about: as he puts it, “Knowing whom to trust, and relying on those who are trustworthy, is itself an aspect of intelligence.”

Intelligence, Education and Trust

I’m not going to get involved in defining intelligence, but I do know this. The tendency to trust others has been shown by trust researcher Eric Uslaner to be positively correlated with optimism, and with a sense of control.

People who feel the world is basically going downhill – and that others are controlling their lives – are untrusting people. By contrast, those who feel that the world is generally moving in a positive direction, and who feel some degree of control over their own lives, are more likely to trust other people.

And what drives those distinctions? Uslaner points out the biggest drivers are income inequality and education. In other words: uneducated people in a society of high inequality are at the greatest disadvantage.

The Vicious Circle of Trust, Education and Investment

The less that uneducated people in an unequal society are willing to trust those who understand financial planning, the more likely they are to stay doomed to low income, thus driving perceptions and reality ever downward toward greater inequality. So what’s to be done?

Of course, it would help if the financial industry got more trustworthy. Josh Brown, in Backstage Wall Street, notes that “93% of all investors didn’t understand that their broker didn’t have a fiduciary responsibilty to them.” Yet the industry continues to advertise an image of trustworthiness, while opposing legislation to make them subject to fiduciary standards.

Such behavior definitely drives mistrust, and it’s the industry’s own fault.

But other policies are society’s fault. In the rush to cut our deficits, I heard a few weeks ago that the School District of Los Angeles no longer employs any music teachers. Certainly education has become a far lower priority these days in our rush to what we think is fiscal rectitude. A casualty is trust.

And finally, inequality itself breeds distrust. That simple fact is very uncomfortable for a great many of haves, and a lot of political ideologies. But the fact is, economically egalitarian societies have higher trust levels. Inegalitarian societies have lower trust levels. The trends are self-reinforcing.

Do we want a vicious circle? Or a virtuous circle? If we’d like people to participate in the stock markets, we’re not going to get there by advertising or by cutting school budgets.

We’ll get there through trust. And it shouldn’t take a high IQ to figure that out.

You Think Your Dog is Smart? You Don’t Know the Half of it

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Smart Dog

According to a New York Times article, your average dog “is about as intellectually advanced as a 2- to 2-and-a-half-year-old-child.”  The article goes on to say:

Dr. Coren has come up with an intelligence ranking of 100 breeds, with border collies at No. 1. He says the most intelligent breeds (poodles, retrievers, Labradors and shepherds) can learn as many as 250 words, signs and signals, while the others can learn 165.

But Clive D. L. Wynne, an associate professor of psychology at the University of Florida who specializes in canine cognition…takes issue with efforts to compare human and canine brains.

He argues that it is dogs’ deep sensitivity to the humans around them, their obedience under rigorous training, and their desire to please that can explain most of these capabilities. They may be deft at reading human cues — and teachable — but that doesn’t mean they are thinking like people, he says. A dog’s entire world revolves around its primary owner, and it will respond to that person to get what it wants, usually food, treats or affection.

“I take the view that dogs have their own unique way of thinking,” Dr. Wynne said. “It’s a happy accident that doggie thinking and human thinking overlap enough that we can have these relationships with dogs, but we shouldn’t kid ourselves that dogs are viewing the world the way we do.”

What is Intelligence, Anyway?

Apparently the conclusion we are meant to draw is that dogs look pretty smart, but it’s really just behavioral training—good old stimulus and response stuff, hooking them in by bribes to get their food, treats and affection. (If I read it wrong, please correct me).

Most of us dog-owners, I suspect, find this treatment unpersuasive. But don’t believe us. Consider the far more striking information from earlier in the same article. Consider Jet:

Jet is both a seizure alert dog and a psychiatric service dog whose owner has epilepsy, severe anxiety, depression, various phobias and hypoglycemia. Jet has been trained to anticipate seizures, panic attacks and plunging blood sugar and will alert his owner to these things by staring intently at her until she does something about the problem. He will drop a toy in her lap to snap her out of a dissociative state. If she has a seizure, he will position himself so that his body is under her head to cushion a fall.

Jet is not unique. Other dogs are trained to deal with suicidal tendencies, turning on lights for trauma victims, reminding owners to take medication, and so forth.

The Fallacy of Reducing Motives to Behavioral Indicators

I don’t know about you, but I don’t find it useful to describe Jet’s behavior solely in terms of fulfilling a desire for affection, much less food. It’s precisely the same discomfort I get when I hear economists describe unselfish behavior among humans.

In an attempt to preserve an elegant theoretical model about how self-serving behaviors lie at the heart of all human action, I have heard economists ascribe unselfish behavior to longer term self-aggrandizement, or to advancing the species’ interests by occasionally sacrificing the good of an individual.

But sometimes devotion to others, unselfishness, an inclination to collaborate, is best described as simply what it appears to be.

As ee cummings put it, sometimes a cigar is just a cigar.

I trust my dog with my life—but not with my ham sandwich. Which suggests it’s highly doubtful that my dog would save my life in order to get a deferred-gratification ham sandwich. Something else is going on.

So is Jet smart? If you measure by human vocabulary, as smart as a 2 year old. Personally I’m not blown away by two-year olds’ intelligence, except in comparison to 1-year olds. That’s not what I mean when I say wow, my dog is really smart.

What I mean when I call a dog smart is that empathy thing, the ability to not hold a grudge, to reach out and touch someone.

To elevate the word “smart” (as in vocabulary breadth) to a higher level than “smart” (as in save a life and mend a heart) is to waste a good word.

Do We Learn From Our Mistakes? Or Not?

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The NYTimes today reported yesterday on a Harvard Business School study of venture capital-backed entrepreneurs to test whether or not we learn from our mistakes. The results are confounding to many—including me.

Here’s the story. Several thousand VC-backed companies were studied over 17 years. First-timers had an aggregate success rate of 22% (success meaning going public).

The study is about those trying for a second time. Did the 78% who failed the first time learn from the experience, and do better the second time? Or worse? How did the 22% first-time winners fare—did they get lazy and decline? Or did they somehow do better the second time?

No less an expert than Gordon Moore, sainted ex-leader of Intel and the author of “Moore’s law,” said “You’re more valuable because of the experiences you’ve been through under failures.”

I’m with Gordon. But according to this data, we’re both wrong.

Those who succeeded the first time upped their success rate, to 34%. But those who failed the first time stayed mired in the muck, at 23%. So much for the myth of the gritty, plucky lads who pick themselves up and learn from their failures.

Apparently the data are not the problem: “the data are absolutely clear,” says Paul Gompers, one of the study’s authors. Yet it is still far from clear what the data mean.

As is often the case, data are one thing, and explanation another. Of course, the obvious explanation may be true: people just do not learn from adversity. This seems to be the study’s authors’ view—that the learn-from-failure ethos celebrated in Silicon Valley is really just anecdotal tales over-told.

Then again, maybe we actually do learn more from success than from failure. If so, perhaps that’s because of increased confidence resulting from one win.

Or, maybe only the really good people learn at all. And they can learn from experience alone, whether success or failure.

Or, perhaps these conclusions are only true of a certain type of person, characterized by some cross-cutting characteristic, such as risk tolerance. (Did you know height is correlated with IQ? True: short people score lower on the same IQ tests that tall people take. Of course, if you separate young children from the adults, or use age-normalized tests, the correlation goes away).

Or, to channel a recent 30 Rock storyline, maybe the first time winners are just very good-looking people who are actually horrible, but live in a bubble in which others let them pass. Hey, you never know!

Causal deductions are never fully provable—thanks, Dr. Hume. But progress can be made toward explanations.

So, what do you think’s going on?

And I’ll throw one idea into the ring, borrowed from Karl Popper, who developed the falsifiability theory of meaningfulness. A theory which is highly disprovable, but which remains standing, is superior to a hard-to-disprove theory.

Maybe people who fail have a much greater chance to learn. Why it is that they don’t still seems a mystery to me.

I Think Therefore I am a Consultant: Not!

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I worked 15 years for a strategy consultancy, then 4 years for a change management firm.  They were wildly different.  The first celebrated raw brain power.  The second focused on emotional alignment.  (This explains my schizophrenia).

I then went off on my own to do trust work.

A few years later, I collaborated with an ex-strategy colleague, an excellent consultant.  Call him Ishmael.  He was in Boston, me in New Jersey; we met in Stamford to spend the day working together.

He began, “Let’s first spend a few hours discussing what it is the client wants.”  A classic strategy question.  I settled in to the old easy chair.

Then it hit me.  “No, Ishmael,” I said, “let’s just call the client and ask them what they want.” 

Ishmael was not impressed, but that was OK.  I knew I’d just discovered something.  

David Maister  has a medical metaphor to describe professional services firms.  There are Nurses, Pharmacists, Family Doctors, and Brain Surgeons.

Many firms aspire to be Brain Surgeons.  The market says the true number is far smaller.  Brain surgeons, as Maister points out, are known for two things.  One is great technical mastery; the other is a low degree of client interaction.

There are great examples of the “brain surgeon” model. Think of the leading strategy firms, used-to-be investment banks, think tanks, many top law firms. They are high-margin businesses, pay high salaries, and cultivate a mystique of envy and status. 

And—I would argue—they are grossly under-achieving.

Why?  Because of the cult of intellect.  We revere IQ in this culture; it is more important to cite Goleman’s Emotional Intelligence  than to read it–much less practice it. 

Malcolm Gladwell punctures this cult of intellect in talking about innovation:

Ideas weren’t precious. They were everywhere, which suggested that maybe the extraordinary process that we thought was necessary for invention—genius, obsession, serendipity, epiphany—wasn’t necessary at all.

He describes Nathan Myhrvold’s first Innovation Session, bringing together a half-dozen brilliant people:

"He thought if we came up with a half-dozen good ideas it would be great, and we came up with somewhere between fifty and a hundred. I said to him, ‘But you had eight people in that room who are seasoned inventors. Weren’t you expecting a multiplier effect?’ And he said, ‘Yeah, but it was more than multiplicity.’ Not even Nathan had any idea of what it was going to be like."

The finest law firms and strategic consultancies are great in large part not because of brilliance, but because of brilliance shared.  The pity is, their very ethos denigrates the “share” part of the equation. 

As Maister says, part of the “brain surgeon” model is the image of high-on-a-mountain solo thinkers who occasionally interact—and only with each other—to create brilliance.

How much enormous value is left on the table because of the celebration of an heroic myth of solo cogitation, rather than of direct intellectual, collaborative contact with the client?  Two bright people working collaboratively can usually out-think one very bright person.  Make it four people, and there’s no contest. 

The answer is to focus not on getting better and better at solo cognitive manipulation, but also on sharing that brilliance in a way that is ego-less, collaborative, and enthusiastic.  Brilliant 1 plus brilliant 1 makes not 2, but 5.  As Myrvohld said, it’s way beyond multiplicity. 

The absent-minded professor, the eccentric genius are respected, even revered.  But this just lets them off the hook.  By idolizing such anti-social behavior, we are rewarding mediocrity relative to what they are capable of accomplishing.
 

IQ, EQ and the Next Billion Banking Consumers

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The Boston Consulting Group might house the world’s highest concentrations of brainpower per square foot.  BCG is to consulting what Goldman Sachs and Cravath are to banking and law.

When it comes to intelligence, they are tops.

In terms of IQ, that is.

EQ?  Well, that’s not so much what they’re aiming for.

Case in point—the most recent article from BCG’s Industry Insight series, The Next Billion Banking Consumers. (The piece shares two authors and whole paragraphs verbatim with a more general piece from BCG’s Perspectives article series, titled The Next Billion).

BCG’s article series—particularly Perspectives—have been the source of breakthrough thinking for several decades now, including the experience curve and the barnyard portfolio theory, and the general concept of strategy as the pursuit of sustainable competitive advantatage.

The article opens big:

The problem of financial exclusion—individuals’ limited access to or use of formal banking services—looms large around the world. It both reflects and contributes to the stark socioeconomic divide that pervades many emerging markets…

By embracing innovative business models, however, banks can upend the economics of reaching consumers long considered impossible or unattractive to serve.

Great—energizing the banking sector to help accomplish what microfinance suggested might be possible. Cutting-edge capitalism, bringing the next billion—“just above the poorest of the poor and just below those who are currently targeted by most banks”—into the mainstream of the global economy.

Indeed, much of the article addresses the need for changes in product development, distribution, marketing and organization structure, listing some exciting innovative practices.

Then there appears this paragraph:

Unfortunately, regulations sometimes make it difficult—if not impossible—to offer products that suit the financial means of the next billion consumers. Our analysis shows, for example, that Indian banks would need to charge a 32 percent interest rate just to break even on the kind of small, short-term personal loan that the next billion consumers would want.  Yet national regulations prohibit banks from charging interest rates to priority sectors that exceed the prime lending rate, which currently stands at about 12 percent.  This problem underscores the need for regulatory reform that complements initiatives to reach the next billion consumers.  (italics mine)

The need for regulatory reform?  Let me get this straight.  A banking industry in a country with 5% inflation and 6% one-year t-bill rates needs 32% interest rates to break even in a new market, and the problem is—the presence of usury laws?

How about—oh, I don’t know—a banking industry that can make money on less-than-32% interest rates?

Unless I am seriously missing something—always a possibility—the inclusion of this paragraph, alongside discussion of radical product and distribution redesign, is socially and politically tone-deaf.  Narrow.  Myopic.

It feels like a hammer seeing an all-nail world.  If your constant goal is the pursuit of corporate competitive strategic advantage, then of course regulatory “reform” is inconsequentially different from product innovation—it all adds to competitive advantage, right?  (Except of course for the poor schmoe trying to make a buck with his feet in plus-32% debt cement shoes). 

In an increasingly connected world, the view of competition as the be-all and end-all of business—even just of strategy—is antiquated.  Out of sync. Competition without commerce just doesn’t add up to much.

The world is connecting more.  And it isn’t about just the connections, or the connected.  It’s about the synergy in the combination.

Kind of like IQ and EQ.