New IQ research shows why smarter people make better decisions

A new study from the University of Bath’s School of Management has found that individuals with a higher IQ make more realistic predictions, which supports better decision-making and can lead to improved life outcomes.

The research, published in the Journal of Personality and Social Psychology, shows that people with a low IQ (the lowest 2.5% of the population) make forecasting errors that are more than twice as inaccurate as those made by people with a high IQ (the top 2.5% of the population).

The research used data from a nationally representative sample of people over 50 in England (English Longitudinal Study of Aging ELSA), assessing their ability to predict their own life expectancy.

Individuals were asked to predict their probability of living to certain ages, and these estimates were compared with the probabilities taken from Office for National Statistics life tables (a demographic tool used to analyze death rates and calculate life expectancies at various ages). The study controlled for differences in lifestyle, health, and genetic longevity.

By analyzing participants’ scores on a variety of cognitive tests, as well as genetic markers linked to intelligence and educational success, Chris Dawson, Professor of Economics and Behavioral Science at the University of Bath, showed that smarter individuals tend to have more accurate beliefs about uncertain future events – they are more skilled at assessing probability.

Individuals with a higher IQ are significantly better at forecasting, making fewer errors (both positive and negative) and showing more consistent judgment compared to those with a lower IQ.

“Accurately assessing the probability of good and bad things happening to us is central to good decision-making,” said Professor Dawson. “Almost all the decisions we make, whether it’s starting a business, investing, crossing the road, choosing who to date, all require probabilistic assessments.

“IQ is already known to predict health, wealth, income, occupational status and educational attainment and this research highlights one possible channel through which people with a lower IQ do worse on all these outcomes.”

Professor Dawson suggests that explicitly stating probability estimates on information relating to health and finance for example, rather than relying on individuals to do their own calculations, could help people prone to forecasting errors to make more informed, accurate decisions.

“I found that certain genetic traits linked to intelligence and education are associated with more accurate predictions, suggesting that lower cognitive ability may causally contribute to the formation of more biased assessments,” said Professor Dawson. “Probability estimation is the most important aspect of decision-making and people who struggle with this are at a distinct disadvantage.

“Expectations about the future shape how households make critical decisions – like how much to save, when to retire, or whether to invest. Poorly calibrated expectations can lead to bad financial decisions, and reduced economic welfare, which can adversely affect national growth.”