The investment business is full of intelligent people. However intelligence isn’t enough for investment success. From Get Rich Slowly:
If you are in the investment business and have an IQ of 150, sell 30 points to someone else. You do have to have an emotional stability and an inner peace about your decisions. – Warren Buffett
If you think you have an IQ of 160 but it’s 150, you’re a disaster. It’s much better to have a 130 IQ and think it’s 120. – Charlie Munger
Buffett and Munger are both talking about the idea of making better investment decisions. This requires both humility and an ability to deal with the ups-and-downs of the markets. Maybe what investors need isn’t pure intellectual firepower but critical thinking skills. Heather A. Butler writing at Scientific American:
Critical thinking is a collection of cognitive skills that allow us to think rationally in a goal-orientated fashion, and a disposition to use those skills when appropriate…Critical thinking means overcoming all sorts of cognitive biases (e.g., hindsight bias, confirmation bias, etc.).
Now we’re talking. The ability to overcome cognitive biases, including our own ‘bias blindness,’ is a key in order to handle the stress and strains of investing. The good thing for investors is that they can cultivate their cognitive skills. Whereas IQ is largely beyond the reach of training. Heather A. Butler again at Scientific American:
Is it better to be a critical thinker or to be intelligent? My latest research pitted critical thinking and intelligence against each other to see which was associated with fewer negative life events. People who were strong on either intelligence or critical thinking experienced fewer negative events, but critical thinkers did better.
So it probably doesn’t hurt to have some intellectual firepower when it comes to the financial markets but a critical thinking mindset may be preferable. Because in the end investors who experience “fewer negative events” are likely to come out on top.