Finance and Intelligence: A Survey

Abstract

Do more intelligent investors take better economic decisions than less intelligent ones? Is risk attitude, in particular risk/loss aversion, linked to cognitive ability? Does an investor’s cognitive ability impact his/her patience? Is financial performance positively linked to investor’s intelligence? These research questions have become highly relevant with the development of behavioral economics and behavioral finance, following the recognition that humans are not homo economicus. This paper reviews the literature devoted to answering the above questions. We first discuss the barely debated definitions and measures of intelligence/cognitive ability used in psychology, economics and finance. We then review the results related to the (controversial) link between risk aversion and cognitive ability. We show that the literature provides unambiguous results for patience; individuals with a higher level of cognitive ability being more patient on average. Finally, we review the contributions linking (successfully or not) portfolio choice and financial performance to cognitive ability.