The Catch-22 of Financial Literacy

Chris Dillow – New research may show intelligence does not correlate with better investment returns. “A team of economists led by Mark Grinblatt at the University of California Los Angeles studied the unit trust holdings of Finnish investors. And they found that while investors with high IQs were more likely to buy funds with low fees, their investments performed no better than those of investors with lower IQs.” Accordingly, as investors become increasingly financially literate, they become overconfident in their selection of fund managers, acquiring an “illusion of skill”. This overconfidence, or what a classics major would call hubris, is patently unfounded, and thus even the smartest investors can on occasion make the dumbest decisions.

Nevertheless, such confidence is required in making “risky but profitable decisions” and is often indicative of  low personal debt and retirement preparedness. But maybe in the realm of investment, ignorance really is bliss. Within reason, of course.