Sunday 31 January 2016

The saving grace

I am a saver, but I do not know exactly why. For a rainy day perhaps, but rainy days are plentiful and cheap: I stay in and read something. Perhaps I save so that I can be gently fed when unable to do so in old age. More likely, perhaps I secretly wish to astound my neighbours by driving up in a red Ferrari, though rather than admiration this will more likely engender doubts about my mental state. Furthermore, I am told that only a very limited set of Ferraris hold their value. Moreover, after relaxing the rules regarding how pensions could be spent, a Government Minister agreed that pensioners “could blow the whole lot on a Lamborghini”. Decisions, decisions.

Savings have survival value. Food and resources get you through lean periods. It is prudent to fear the worst and provide a buffer against storm and starvation. Surely everyone realises that?

R.W. Hafer. Cross-country evidence on the link between IQ and financial development. Intelligence 55 (2016) 7-13.

Research finds that individuals with higher levels of intelligence are likely to save relatively more than others. Evidence from macro-level studies shows that countries with higher than average IQs also are characterized by greater levels of saving. These two outcomes suggest the testable hypothesis: Do countries with higher national average IQs, on average, have more developed financial markets to accommodate this increased savings activity? Using three popular measures of financial development and the Lynn-Vanhanen national IQ measure, I test that hypothesis for a large sample of countries. The evidence indicates that, all else the same, IQ is a signficant predictor of financial development.

The author takes 3 measures of national wealth and plots them against IQ. The bivariate correlation between IQ and Liquid Liabilities, Private Credit and Bank Assets is, respectively, 0.66, 0.76, and 0.66.  Private Credit is considered the most accurate measure of savings, so I have used that one, but all three are similar.



French legal systems are less conducive to wealth generation than those from other countries, such that the correlations between French legislation and wealth are negative. 

Hafer puts in other predictive variables, and finds they made a contribution, but not so much as to alter the conclusion that the main driver is human ability.

The evidence presented here indicates that countries with higher national IQ are more likely to experience greater financial development than countries with lower levels of IQ. Using three popular measures of financial development, the effect of IQ occurs independently of a country's legal origin, its initial level of real GDP per capita and its level of economic freedom. This finding is robust to a variety of tests, including the addition of alternative institutional measures, such as human development, health, and education, as well as more specific indexes of economic freedom.

Not only do individuals with higher IQs tend to be thriftier and save more, but countries comprised of such individuals apparently establish and develop financial institutions that promote such behavior.

In brief, when clever people save, and when countries are composed of clever people save, then financial institutions evolve to handle those savings, and to cater for deferred expenditures. Money transfers are the first step, financial instruments like mortgages and futures markets the second. Such markets facilitate the saving habit, reduce transaction costs, speed up the re-allocation of resources, and provide deep pools of wealth to get societies through times of trouble. That is the theory anyway. The study period started in 1980 and for painfully obvious reasons stopped in 2009. The deep pools were not deep enough. Have the advanced and clever nations been clever in carrying out Quantitative Easing? I don’t think so, but as Chou En Lai remarked of the French Revolution “It is too early to tell”. (Yes, I know he misheard the question, and thought that Kissinger was asking about the effects of the then recent French Student revolution of 1968).

Read the whole thing here:


  1. Looks like the usual curvilinear relationship between national IQ and prosperity.

    Now I wonder, once you extract IQ, is the next most predictive variable...


    "The Effect of Language on Economic Behavior: Evidence from Savings Rates, Health Behaviors, and Retirement Assets"

  3. From evolutional perspective, saving = storage of food.

    Species living in the climate or region with cycle of food shortage have to store food for the rainy days.

    Again projecting what animals do on to human (Rusthton analysis), human living in climate with killing cold have to save in order to survive in the winter. This especially is true for farmer over hunter-gatherers. Hunter might have prey available in winter. But farmer have to produce enough food in warm season to survive winter. So naturally farmers develop stronger sense of saving over hunter-gatherers. Thus temperate zone famers are not only saver but also eager producer. Hunter-gatherer are taker, not producer by nature. Hunter-gatherers are taker, not producer by nature.

    Concept of property/wealth ownership also selects good savers in human evolution. In civilization, wealth/property is protected by laws. Accumulated wealth can be directly translated into survival advantage of individual and offspring, comparing to non-saver. Hunter-gatherers are taker of nature, who believe valuable belong to every body (no private ownership). So like animals, valuable is belong to the one with stronger muscle like lion fighting over kills. So people with recent hunter-gatherers history have higher rate of property crime (arm robbery or stealing)? If this is true, my intuitive hypothesis is correct.

    Certainly natural life expectancy will be correlated with desire of saving. If some one has short-life expectancy. Saving is meaningless. Better live the day like no tomorrow.


    1. Like I said before, IQ is helpful factor in saving behavior, but not causing factor. No matter how smart you are, saving is not very useful if you live in a tropical hunter-gatherer society (no cyclic food shortage, no ownership law).

      On the other hand, saving behavior needs higher intelligence in order to calculate amount of food needed for winter survival (days without food vs food daily consumption rate, long term memory of storage quantity and quality, storage location ect).

      So natural need for saving and planning selects individual with higher IQ. Not other way around.


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