Wednesday, June 22, 2022

More intelligent people know better how the economy works, regardless of education level

Smart people know how the economy works: Cognitive ability, economic knowledge and financial literacy. Chien-An Lin, Timothy C.Bates. Intelligence, Volume 93, July–August 2022, 101667.


• Tested if cognitive ability drives economic knowledge and financial literacy.

• Ability strongly predicted greater economic knowledge.

• Ability predicted greater financial literacy.

• Effects on financial literacy mediated by economic knowledge.

• Associations not influenced by education or economic training.

Abstract: Cognitive ability correlates positively with many financial outcomes but why? One important relationship to understand is the degree to which cognitive ability is associated with greater knowledge of economics, but this has not been tested extensively. Here in two large, pre-registered studies (N = 1356), we tested the relationship between cognitive ability and both economic knowledge and financial literacy. Three predictions were key: i) Cognitive ability would show a large positive association with economic knowledge; ii) Cognitive ability would be associated with better financial literacy and iii) Greater economic knowledge would be positively associated with financial literacy. All three predictions were supported and replicated. Cognitive ability predicted economic knowledge (r = 0.37 to 0.52) independent of and with much larger effects than either educational attainment or economics courses. The findings extend effects of general ability to include greater awareness of economic functions, and improved use of economic information which improves lifetime financial wellbeing.

Keywords: Economic knowledgeCognitive abilityFinancial literacyFinancial knowledge

9. General discussion

Study 2 successfully replicated all study 1 findings relating cognitive ability to economic knowledge and to financial literacy. Four major results emerged in this set of studies. First, controlling for multiple demographic variables, cognitive ability accounted for substantial variance in economic knowledge and in financial literacy. Second the association of cognitive ability with economic knowledge was largely unchanged when education level was controlled. Even controlling for economic training left the association largely undiminished. This suggests that the association of cognitive ability and economic knowledge is not an artifact of exposure to education or, perhaps even more surprisingly, even of specific training in economics. Though this is contrary to some intuitions regarding effects of teaching, it is in line with large studies testing intelligence, knowledge, and knowledge acquisition (Ree & Carretta, 2022). These show that intelligence is powerful predictor of knowledge and knowledge acquisition, but that knowledge itself is a poor predictor of knowledge acquisition. The findings, then, are in line with the idea that knowledge acquisition is strongly under the control of cognitive ability and with relatively weaker effects of teaching due to the strong influence of ability on knowledge acquisition (Ree & Carretta, 2022). Third, supporting importance of cognitive ability for financial wellbeing, we found that brighter people reported better management of investment, insurance, and careful spending. Finally, study 2 replicated the link between cognitive ability, economic knowledge, and financial literacy. These robust positive associations of cognitive ability with economic knowledge and financial literacy are compatible with the possibility that improvements in general ability may cascade into valued improvements not only in economic knowledge but also in lifetime financial outcomes.

9.1. Future directions and limitations

We found that cognitive ability is associated with improved economic knowledge, even controlling for education and specific exposure to economics education. Economic knowledge thus joins the growing set of “mental toolkits” such as knowledge of scientific reasoning and analytic thinking (Čavojová, Šrol, & Jurkovič, 2020Ståhl & Van Prooijen, 2018) positively associated with cognitive ability. Identifying additional mental toolkits linked to cognitive ability is a valuable direction for future study. By contrast, the lack of association of formal education with knowledge and literacy suggests that intelligent people may actively seek out, learn, and abstract this economic knowledge as an aid to understanding the world and achieving their goals, even when, and independent of exposure to formal education. Capitalising on whatever these self-guided opportunities are would be of value. The finding that, despite economics being one of the most popular subjects in higher education (Brückner et al., 2015), economic training had only a tiny influence on economic knowledge, suggests that future research might focus on improving the efficacy of economic education. Also, since financial literacy was reliably associated with education and economic training, effective education investments leading to improved student outcomes could influence wellbeing via improved financial behaviours.

This research has limitations that should also be mentioned. The financial knowledge subscale of financial literacy proved less reliable than desirable. Other studies have found modest reliabilities for some of these scale, e.g. in the National Financial Capability Study Omega was under 0.7 (NFCS, 2018). More robust measure of financial knowledge may be possible: For instance including options which include additional choices, such as “not having life insurance but I have no dependants”. Testing could also usefully be expanded to include novel financial products, for instance cryptocurrency (Steinmetz, von Meduna, Ante, & Fiedler, 2021) and non-fungible tokens (Trautman, 2021). Given the trillions of dollars involved, volatility, legal frameworks, etc. association of these assets may differ in their association with ability. Another limitation is that we recruited only UK participants. Replicating these findings in different cultures with distinct norms, for instance, surrounding private ownership or lending money for interest, for example, the concept of Riba (Siddiqi, 2004), our findings would be more robust. Future research could also use these findings to help unpack links of cognitive ability to cognate topics, such as economic attitudes.

To conclude, the present studies corroborated the associations between cognitive ability and multiple financial outcomes. The data provided evidence for substantial positive effects of cognitive ability on economic knowledge in addition to financial literacy. In addition, the studies highlighted surprising weak effects of (current) education and economics training on economic knowledge independent of ability. Economic knowledge and financial literacy are central topics in areas of socioeconomics, political policy, and economics, but the present results suggest a role for cognitive ability which is too seldom discussed. This research begins to fill this gap.

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