TAILIEUCHUNG - IQ and Stock Market Participation

Realistic versions of the buffer stock model with finite horizons and declining in- come after retirement limit considerably the age-range of buffer stock behavior. Car- roll (1997) shows that buffer stock behavior emerges until roughly age 50, and that afterwards people start to accumulate wealth steadily to prepare for retirement. Other models of intertemporal choice deliver different predictions about the correlation be- tween income and consumption and the age-wealth profile during the life-cycle. In the standard life-cycle model without uncertainty, the individual wealth-income ratio is not stationary because consumers save each year until retirement. Hubbard, Skinner and Zeldes (1995) use numerical methods to analyze the properties of a. | THE JOURNAL OF FINANCE VOL. LXVI DECEMBER 2011 IQ and Stock Market Participation MARK GRINBLATT MATTI KELOHARJU and JUHANI LINNAINMAA ABSTRACT Stock market participation is monotonically related to IQ controlling for wealth income age and other demographic and occupational information. The high correlation between IQ and participation exists even among the affluent. Supplemental data from siblings studied with an instrumental variables approach and regressions that control for family effects demonstrate that IQ s influence on participation extends to females and does not arise from omitted familial and nonfamilial variables. High-IQ investors are more likely to hold mutual funds and larger numbers of stocks experience lower risk and earn higher Sharpe ratios. We discuss implications for policy and finance research. Only about 50 OF . households invest in stocks either directly or indirectly via mutual funds in retirement and nonretirement accounts and participation in Europe is even Traditional models in financial economics which prescribe universal participation 2 cannot easily explain these stylized facts viewing them as a participation puzzle. Rather these facts lend support to the common sense view that limited wealth precludes savings let alone Grinblatt is with UCLA Anderson School of Management Keloharju is with Aalto University and CEPR and Linnainmaa is with the University of Chicago Booth School of Business. We thank the Finnish Armed Forces the Finnish Central Securities Depository the Finnish Tax Authorities and the Helsinki Exchanges for providing access to the data as well as the Office of the Data Protection Ombudsman for recognizing the value of this project to the research community. Our appreciation also extends to Antti Lehtinen who provided superb research assistance and to Alan Bester John Cochrane John Heaton Harrison Hong Emir Kamenica Samuli Knupfer George Korniotis Adair Morse Toby Moskowitz Richard Thaler and Annette .

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