What's the link between intelligence and success? This is the question posed by Luis in a comment on yesterday's my post. He says that whilst success is no proof of ability, it could be evidence of it: "it might be reasonable to observe success and think the person is probably smart."

Luckily, we've got some nice evidence here from Mark Grinblatt and colleagues in the form of a study of the link between IQ and stock market performance for investors in Finland.

They found that the one-ninth of investors with the highest IQ made average annualized returns of between 2.2 and 4.9 percentage points more than the four-ninths of investors with the lowest IQs. All this difference came from better buys rather than better sells, and the superior performance of those buys was dissipated within a month.

For me, this suggests that the returns to intelligence are not high in the stock market; the gap between the highest one-ninth and lowest four-ninths is quite large but 2-5 percentage points of annualized returns are modest.

One reason why IQ offers such paltry returns is that intelligence (and ability generally) can lead to over-confidence, which is fatal for investors; there's evidence that this is true for intelligent investors' choices of mutual funds. Also, if a task is impossible, no amount of ability will help us do it. Just as human intelligence has not (yet?) given us cold fusion, so it cannot give us insight into the future, because knowledge of the future is (mostly and for now?) impossible to obtain. If markets are wholly efficient, IQ is wholly useless.

Of course, IQ and ability are different things.But it's not at all obvious that using a wider measure of ability would greatly strengthen the link between stock market success and ability. Although there's evidence that extraversion and femininity can make better investors, the links between these and returns are also modest.

My point here is not one about the stock market. It's about the link between ability and success generally. If this is so hard to pin down in a competitive market such as equity investing, might it also be weak in other areas of economic life? I suspect the tendency to infer ability from success owes more to the outcome bias and post hoc ergo propter hoc fallacy than it does to hard evidence. If so, the tendency of the media and politicians to defer to the wealthy is mistaken.