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Cross-country evidence on the link between IQ and financial development
Abstract
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 significant predictor of financial development.
... In other words, countries with higher national IQ within the population have higher saving rates and tend to possess more financial assets. If IQ positively correlates with savings, it can be argued that a higher IQ can improve financial development and economic growth (Hafer, 2016). The study highlights that human intelligence plays an integral role in justifying various socio-economic outcomes in modern society. ...
... The study highlights that human intelligence plays an integral role in justifying various socio-economic outcomes in modern society. Therefore, countries that aim to optimize economic growth should invest in policies that improve IQ, such as comprehensive education and improved healthcare (Hafer, 2016). Such approaches can improve the financial behaviors of the citizens, thereby enhancing the economic wellbeing of the overall society. ...
Randy Brazie Human behaviors are influenced by past experiences. Stress and trauma are potent determinants of thought processes and decision-making. They also influence perceptions towards risks. Past studies have linked these behaviors to various financial biases. This article explores human behavior and impacts on investment decisions. Behavioral finance shows that investment decisions are affected by cognitive factors such as biases, mood, and emotions. They also influence the rationality and nonrationality of investment decisions. The paper demonstrates that human brain architecture is an element in decision-making due to its involvement in information processing and memorization. However, cognitive psychology does not fully address the underlying nervous system response to stress and perceived threats. Based on the findings, exposures to stress and trauma can increase the sensitivity to financial uncertainty. Individuals who experienced the devastating effects of trauma may be risk averse or excessive risk takers. This element of underlying Sympathetic Nervous System response explained by Polyvagal Theory as applied to behavioral finance and financial bias specifically, are not addressed in past or current literature.
... Higher national IQ is associated with better overall health, higher levels of democratization, and less corruption, among others. Recent evidence also shows that IQ is positively associated with greater entrepreneurial activity ( Hafer & Jones, 2015), good governance ( Rindermann, Kodila-Tedika, & Christainsen, 2015), and financial development ( Hafer, 2016). Researchers also have found that IQ and happiness are related, though the relationship seems more complicated. ...
... Theoretically ( Coase, 1960;North, 1990) and empirically ( Norton, 1998;Beck & Levine, 2005;Jones & Schneider, 2006;and Rode & Coll, 2012), differences in property rights and rule-of-law have been shown to help explain differences in economic growth across countries. This reflects several channels of influence, such as how institutional arrangements and contract law effect entrepreneurial activity ( Hafer & Jones, 2015) and the development and functioning of financial markets ( Levine, Loayza, & Beck, 2000;Hafer, 2016). For this study we use the 1985 value of the "Legal System and Property Rights" sub-index from the Economic Freedom of the World Index ( Gwartney, Lawson, & Hall, 2012). ...
Previous research has found that there is a statistically significant, positive link between country-level IQ and various measures of aggregate production, such as GDP. This study extends that analysis by estimating the relationship between IQ and a new measure of economic welfare. Developed by Jones and Klenow (2016), welfare is not a measure of spending on public assistance programs, but a theory-based empirical construct combining several metrics of economic well-being. Using this new economic welfare index for a large sample of countries (74), we find that IQ is a statistically significant (5% or better) and economically important predictor of welfare growth. A one-point increase in IQ is associated with a 4% increase in welfare growth for the average country. Our results support the view that national IQ is an important determinant of cross-country differences in economic activity and welfare.
... To measure financial development, this study used a proxy already used in the studies by Rousseau & Watchel (2011) and King & Livine (1993), where credit to the private sector was used as a proxy for financial development. Credit to the private sector is private credit that symbolizes the level of financial intermediaries and is the best measure of financial development (Hafer, 2016). This study also uses variables based on the study of Rousseau & Watchel (2011) and King & Livine (1993), i.e. variables such as inflation, trade openness and unemployment. ...
Income inequality is an enduring issue and an important one to address, especially in the new era of digital transformation, as it is a crucial element in promoting persistent income inequality. The theory is that while financial development promotes economic growth, the mixed explanations of previous studies show that this does not always help low-income people in emerging economies. Moreover, the effects of globalization may reinforce motives and increase opportunities for international corrupt practices. It is, therefore, crucial to explore how corruption can be motivated by ineffective rules governing cross-border crimes and how technology can open up new avenues for corrupt behavior, for example by making it easier to find victims, accomplices and money. Profound socio-economic changes can also provide incentives and opportunities for corruption. This study examines how corruption and financial development affect the wealth gap in a developing country like Malaysia over the period 1995 to 2021. The empirical results show that financial development has a positive impact on income inequality. Moreover, the result also shows that corruption control is an insignificant determinant of per capita income in Malaysia. Even though the growth of the financial sector has led to a variety of outcomes, it has only helped to reduce income inequality. Income inequality is negatively and significantly affected by the interaction between financial development and anti-corruption. It is therefore important to promote financial development, prevent corruption and increase government transparency as these factors can promote sustainable economic development and resilience.
... In terms of measurement, the existing studies used traditional proxies of FD (the ratio private credit to GDP and the ratio stock market capitalization to GDP) (e.g., Chen et al. (2019a), Asimakopoulos et al. (2019), Nawaz et al. (2019)). Among other measures, one can mentioned Zhang et al. (2015), for instance, who used the total loans, the credit to private ratio and the credit to public ratio in China, Hafer (2016) used the private credit and bank assets; Ibrahim and Alagidede (2018) proxied FD through the private and domestic credit in 46 African countries while Pan et al. (2019) similarly used private credit in Bangladesh, and Maskus et al. (2019), Ji and Zhang (2019), Chiu and Lee (2019) also mobilized private credit and stock market capitalization for their study. Other works used alternative indicators such as the money supply as M1 and M2 (Cavalcante et al., 2018) or M3 (Ohlan, 2017); the bank Zscore, return on assets of bank; the nonperforming loans (Ashraf, 2018); the level of stocks traded (Yang, 2019); the bank deposit (Chen et al., 2019b) or the deposit of M3 (Gaies et al., 2019). ...
Applying panel fully modified OLS for a global sample of 88 economies over two decades, this study investigates how the growth affects financial development and human capital accumulation in the long-run. The human capital accumulation has a significant positive impact on the output in our full sample and the LMEs, while it appears to have a significant negative impact for the HIEs. The financial development is found to have a significant positive impact. This article investigates the long term effects of FD and human capital on economic development. Our empirical results highlight the positive impacts of financial development (in general) on economic development. Generally speaking, human capital seems to have a long-run positive influence - the results from dynamic fixed effects autoregressive distributed lag (DFE ARDL) show that the positive impact of human capital is consistent in the long-run, but not really statistically significant in the short run. Financial markets mostly have short-run positive impact and financial institutions have a long-run positive impact on the GDP. Finally, the association between the financial development and human capital in the LMEs shows a significant positive impact for all indicators. These results imply a stronger impacts of the FD in case of the LMEs (or lower level of human capital).
... Recently, Phuc Canh and Trung Thong (2020) confirm long-run mutual relationships between natural resources rents and financial development in a sample of 86 economies from 2002 to 2017. Hafer (2016) suggests that average intelligence level of a country has a linkage with financial development since individuals with higher levels of intelligence might save more. Mlachila and Ouedraogo (2019) add that shocks in commodity prices can alter the development of financial system in commodity-rich countries. ...
We provide a comprehensive cross-country analysis on the impact of national incapacity to cope with natural hazards (i.e., social shocks, political stability, health care, infrastructure, and material security needed to reduce the harmful effects of natural disasters) on financial development. The panel quantile regression analyses on a global sample of 130 countries generally confirm that the financial development of countries with lower capacity to cope is indeed significantly hampered compared to their peers, especially in countries with low financial development levels. Seemingly unrelated regression (SUR) analyses, which acknowledge the dynamic co-existence between both financial institutions and financial market sectors in a given economy simultaneously, offer notable finer details. For example, the handicapping effect on both sectors tends to apply to only countries with higher climate risks. Lack of coping capacity also exert negative effects on the development of financial institutions in countries of all levels of income but only affect financial markets of high-income group. The more detailed look into different dimensions (financial efficiency, financial access, and financial depth) of financial development is also given in our study. Overall, our findings highlight the vital and complex role of “coping capacity” aspect of climate risk on the sustainable development of financial sectors.
... Financial acumen is an amorphous term. It is sometimes referred to as financial intelligence [43] or financial literacy [44]. ...
Banknotes and coins are some of the most frequently traded items in the world. Their current use, however, is unsustainable, and many countries are trying to digitalize their payment systems. The recent pandemic has accelerated this transition. Building on the Theory of Unintended Consequences, the aim of this article is to examine the influence of some pandemic-specific factors (in specific, hand sanitization, conspiracy theory mentality, and financial acumen) on the current and prospective use of e-payment. A particular aim of the study is to analyze these relationships in Serbia (as an example of a cash-centric society). The study is based on primary data gathered via a questionnaire. The questionnaire was designed for the purpose of this study. In total, the study examined N = 474 examinees. The results of this study confirm that the pandemic-induced variables are statistically significant predictors of e-payment use. In particular, hand sanitization, conspiracy mentality (reversely), and financial acumen positively affect current and prospective e-payment use.
... The inherent characteristics of this operation involve uncertainty (Gil-Lafuente, 2005), as much of its component elements rely on the availability of complete information and the efficiency of the market (Fama, 1998). The application of economic principles to decision-making (Blanco-Mesa, 2020), hence financial activities (Fabozzi and Drake, 2009), has drawn much attention from several fields of knowledge such as engineering (Xu et al., 2018), mathematics (Grech, 2016), statistics and probability (Bouchard and Nutz, 2015;Doucet et al., 2015) and psychology (Duclos, 2015;Hafer, 2016). ...
This paper presents applications of computational intelligence tools in investment decision making processes. The aim is to build effective stock portfolios, for diverse risk-oriented individuals, including both, objective and subjective inputs. The proposed methods include the analysis of 5 different stock shares from companies that are in the Nasdaq 100 index, namely: Microsoft, Amazon.com Inc, MercadoLibre Inc, Intel Corporation and Facebook Inc using the ordered weighted average distance (OWAD) operator, the ordered weighted averaging adequacy coefficient (OWAAC) operator and the ordered weighted averaging index of maximum and minimum level (OWAIMAM) operator. Results show that a risk seeking investor would prefer stocks that display the behavior of the analyzed dataset of Amazon and a conservative investor would prefer Intel. The main advantage of the proposed methods is introducing multiple objective and subjective data in a single formulation that includes risk aversion, aptitude, expectations, and investment inputs, providing a wider representation of options and scenarios.
... The studies like Ahmed 4 and Ng et al. 5 proposes some traditional drivers for financial development such as inflation, government costs, education level of the people, and so forth. Furthermore, gender, IQ of the people, and export rate also have been introduced as some recent drivers of financial development by Hafer, 6 Zins and Weill, 7 and Mlachila and Ouedraogo. 8 The study of Niroomand et al. 9 proposes a simple mathematical programming model for countries' credit ranking problem using some financial development based indicators. ...
Financial development means some improvements on providing the information about investment possibilities in a region or country. In this study, a new perspective of financial development is considered which is called the multi‐criteria global financial development‐ranking problem. In this problem, some countries from the Middle East are considered to be ranked according to the criteria of global financial development from the world bank database. Due to high number of criteria that may affect the quality of the obtained ranking negatively, a solution methodology in three stages is proposed. First, as a novelty, an improved version of the weighted principal component analysis (PCA) approach is proposed to select the most important criteria from the initial set of criteria and also determine their importance weights. This approach considers both linear and nonlinear relationships of the data instead of considering just linear relationships. Then using the reduced decision matrix and the obtained importance weight values, the technique for order of preference by similarity to ideal solution multi‐criteria decision approach is used to rank the countries of case study. The computational study is done based on the proposed improved weighted PCA approach and the obtained results are analyzed and compared by those of the classical approaches, for example, some versions of the classical weighted PCA approach.
... National IQ data was extracted from the book Intelligence: A Unifying Construct for the Social Sciences (Lynn & Vanhanen, 2012). Although Lynn's datasets have been subjected to criticism, scholarly opinion has generally changed from negative to positive and many independent research teams now use them (Dutton, van der Linden & Madison, 2019;Grigoriev & Lapteva, 2018;Hafer, 2016;León, 2018;Lv & Xu, 2016;Minkov, Welzel & Bond, 2016;Nikolaev & Salahodjaev, 2016;Rindermann & Becker, 2018;Thies, 2019). More importantly, a recent recalculation of the national IQs from the original sources by David Becker has validated the original calculations. ...
Patient people fare better in life than impatient people. Based on this and on economic models, many economists have claimed that more patient countries should fare better than less patient countries. We utilize cross-national data in non-cognitive traits measured in the Global Preference Survey (GPS). This survey measured six non-cognitive traits — risk and time preferences, positive and negative reciprocity, altruism, and trust — across 76 countries in about 80,000 persons. As such, it provides the best current database of economics-focused non-cognitive traits. We combine this database with existing estimates of national intelligence (national IQs) and model country outcomes as a function of these predictors. For outcomes, we used the 51 national well-being indicators from the Social Progress Index (SPI) as well as the composite extracted from this, the general socioeconomic factor. We find that non-cognitive variables, time preference included, are only weakly predictive of national well-being outcomes when national IQs are also in the model. The median β across the indicators was 0.11 for time preference but 0.39 for national IQ. We replicated these results using six economic indicators, again with similar results: median βs of 0.15 and 0.52 for time preference and national IQ, respectively. Across all our results, we found that national IQ has 2-4 times the predictive validity of time preference. These results are fairly robust to inclusion of a spatial autocorrelation control, alternative measures of national IQ and time preference, or no controls. Our results suggest that the importance of national non-cognitive traits, including time preference, is overestimated or that these traits are mismeasured.
... 70-72, p. 74;Nyborg & Jensen, 2001;Schmidt & Hunter, 2004;Schmidt, Hunter, Outerbridge & Goff, 1988;Zagorsky, 2007;Zax & Rees, 2002). Hence, as achievement after achievement is attained nationwide, one can definitely expect higher levels of gross domestic product (GDP) per capita (Jones, 2013;Jones & Schneider, 2010;Lynn & Vanhanen, 2002, financial development (Hafer, 2016;Kodila-Tedika & Asongu, 2015), economic (GDP per capita) growth rate (Hanushek & Kimko, 2000;Jones & Schneider, 2006;Ram, 2007;Weede & Kämpf, 2002) and technological progress (Davies, 1996;Gelade, 2008;Jones, 2012a;Lynn, 2012), especially when compared to countries with lower IQ levels. ...
A previous study has shown that the intellectual class, which is represented by the 95th percentile intelligence quotient (IQ) at a normal distribution, displayed the strongest impact upon economic growth. Meanwhile, those with average ability (50th percentile IQ) exhibited the second strongest impact, and followed by the non-intellectual class (5th percentile IQ). In addition, the researchers discovered that only the intellectual class was significant for technological progress. As such, this article re-analysed the dataset employed in prior study via robust regression. As a result, after eliminating several outliers, the levels of IQ for the intellectual class and the average ability group displayed equal impacts on economic growth, and the impacts were larger than that of non-intellectual. Furthermore, the IQ of the average ability group was significant for technological achievement, although not as strong as the intellectual class. Besides, the number of professional researchers employed in the research and development (R&D) sector did not reflect similar paramount effects as the impact of the average ability IQ in generating technological development. Thus, based on the conclusions drawn, this study suggests that the R&D sector should employ professionals who possess not only high academic qualifications, but also exceptional levels of cognitive skills, especially to spark new innovations.
JEL: J24, O31, O47, Z13
This study is the first to empirically examine the association of digital transformation and financial development. We measure digitalization in terms of digital connectivity, uses of the internet, e-business, e-commerce, and e-government. We also employ nine indicators to capture depth, access, and efficiency of financial markets, institutions, and both. By using different econometric techniques to a sample of 27 European countries, we demonstrate the positive influences of digitalization on the developments of both financial markets and institutions. Among all dimensions of digitalization, digitalization in business and public sector and individuals’ digital skills play a critical role in financial developments, while those in consumption may hinder the financialization. With a prevalence of digital transformation, digitalization more likely enhances the depth and efficiency of financialization but shrinks the access to financialization. Our study also suggests the importance of digital transformation in business and public sector in augmenting the depth and efficiency of financial markets, while digitalization in public sectors is an essential factor in driving the access to financial markets. By measuring the short-run and long-run impacts of digitalization, we show that e-commerce and e-government have a long-term beneficial influence on financial markets and financial institutions, respectively.
We study impact of internet and mobile usage on nine different indicators of financial development (FD), including depth, access, and efficiency of both, financial markets, and financial institutions, as well as overall financial development. We apply Granger causality and cointegration tests, PMG ARDL and PDOLS, and a two-step system GMM to a sample of 109 economies and two sub-samples (62 low-and middle-income economies (LMEs), 47 high-income economies (HIEs)) over the period of 1998-2017. The Granger causality tests show long-run bi-directional causality between internet/mobile usage and financial development. We find that internet usage has a significant negative impact on overall financial development, which could be attributed to a negative impact on financial institutions with all their three dimensions, depth, access, and efficiency. At the same time, internet has significant positive impact on financial markets with its three dimensions. Contrary to the opposing effects internet usage, mobile usage has a significant positive impact on all nine indices of financial development. The PMG ARDL and PDOLS estimations clarify that the positive impact of the internet is a short run effect, while the negative effect is a long-run one. The mobile usage impact is a long-run phenomenon. The estimations for two sub-samples show consistently positive impact of mobile phones in HIEs, whereas the results for LMEs are less robust.
One of the most disturbing contemporary episodes in human history that has been decried globally is the recent Libyan experience of slave trade, where migrants captured end-up being sold as slaves. We contribute to the understanding of this phenomenon by investigating the role of cognitive human capital in slave trade. To this end, we use the historic intelligence and slave trade variables respectively, as the independent and outcome variables of interest. Our findings show a negative relationship between slave trade and cognitive human capital. Hence, slave trade is more apparent when cognitive human capital is low. The Ordinary Least Squares findings are robust to the control for outliers, uncertainty about the model and Tobit regressions. We substantiate why from the perspective of massive sensitisation and education, the non-contemporary relationship between cognitive ability and slave trade established in this study has contemporary practical policy relevance in efforts to stem the tide of clandestine travel to Europe through countries in which clandestine migrants are captured and sold as slaves.
This article explores the effect of cognitive abilities on environmental awareness using data from 119 countries for the period 2005-2015. Our findings provide pioneering confirmation that a facet of human psychology, namely cognitive ability, is positively associated with environmentalism. The empirical estimations indicate that when cognitive abilities increase by one standard deviation, climate change awareness increases by approximately 19% (slightly less than one standard deviation). This positive association remains intact when we control for other determinants of environmentalism.
Cambridge Core - Cognition - The Nature of Human Intelligence - edited by Robert J. Sternberg
It has been shown that country-level IQ and aggregated performance by school-age children on international assessment tests in math and science are by-in-large capturing analogous indicators of the cognitive human capital. We expand that analysis by comparing country-level IQ to the World Economic Forum’s Human Capital Index (HCI). This index, comprised of several dozen separate indicators, accounts for inputs and outcomes to measure human capital, across age profiles and gender. Two outcomes are of note. First, there is a positive, significant correlation between IQ and the vast majority of the component indicators in the HCI across all age cohorts. Second, because the HCI’s interpretation of educational attainment extends beyond formal education by including indicators such as on-the-job learning and other work-related skills, our finding that IQ is positively correlated with these measures suggests a deeper connection between national average IQ and the fundamental factors of what constitutes the cognitive side of human capital development.
Following WW2, various researchers found and reported secular gains in IQ, but it was not until additional reports appeared in the 1980s that researchers began to look for the cause or causes. It was quickly apparent that the gains were not limited to any group or nation, but the manifestation of the gains was different depending on time and place. For every discovery, there was a different or opposite result in a different data set. Gains have been large, small, variable, and even negative. Some researchers have found that the gains were on g, while more have found no g loading. Abstract test formats, such as the Raven have often shown the greatest gains, but gains have also appeared in tests of crystallized intelligence. Some data has shown greater gains for the lower half of the intelligence distribution, while others have shown greater gains in the top half, and others have shown equal gains at all levels. Hypotheses for the causes have included environmental factors, genetic effects, reduced fertility, and methodological dependence. Two models are discussed.
[Correction Notice: An erratum for this article was reported in Vol 101(3) of
Psychological Bulletin (see record
2008-10701-001). In this article, it was wrongly stated that that U. Schallberger put forward a hypothesis or hypotheses concerning the magnitude of Swiss IQ gains; in fact, he did not. The erratum includes the author's clarification.] Data from 14 nations reveal IQ gains ranging from 5 to 25 points in a single generation. Some of the largest gains occur on culturally reduced tests and tests of fluid intelligence. The Norwegian data show that a nation can make significant gains on a culturally reduced test while suffering losses on other tests. The Dutch data proved the existence of unknown environmental factors so potent that they account for 15 of the 20 points gained. The hypothesis that best fits the results is that IQ tests do not measure intelligence but rather a correlate with a weak causal link to intelligence. This hypothesis can also explain difficult trends on various mental tests, such as the combination of IQ gains and Scholastic Aptitude Test losses in the United States. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
We estimate the validity of the national IQs presented by Lynn and Vanhanen (2002, 2006) by examining whether they are consistent with the educational attainment of school students in math, science and reading comprehension in 108 countries and provinces. The educational attainment scores in a number of studies are integrated to give EAs (educational attainments) for 86 countries and provinces that have measured IQs. The correlation of EA with measured IQ (N = 86 countries) is .917, and with measured + estimated IQ (N = 108 countries) is .907. Corrected for attenuation, r = 1.0. The quality of the data is evaluated, and the discrepancy between IQ and EA was greater for countries with low data quality, especially low quality of the EA data. There are no major anomalies in the relationship between IQ and EA in individual world regions. To some extent IQ and EA predict each other even within world regions. These results show that national IQs have a high degree of validity.
This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common law countries generally have the best, and French civil law countries the worst, legal protections of investors, with German and Scandinavian civil law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.
Wicherts, Dolan, and van der Maas (2009) contend that the average IQ of sub-Saharan Africans is about 80. A critical evaluation of the studies presented by WDM shows that many of these are based on unrepresentative elite samples. We show that studies of 29 acceptably representative samples on tests other than the Progressive Matrices give a sub-Saharan Africa IQ of 69; studies of the most satisfactory representative samples on the Standard Progressive Matrices give an IQ of 66; studies of 23 acceptably representative samples on the Colored Progressive Matrices give an IQ of 71. The international studies of mathematics, science, and reading give a sub-Saharan African IQ of 66. The four data sets can be averaged to give an IQ of 68 as the best reading of the IQ in sub-Saharan Africa.
This paper investigates whether there is a link between cognitive ability, risk aversion, and impatience, using a representative sample of roughly 1,000 German adults. Subjects participate in choice experiments with monetary incentives measuring risk aversion, and impatience over an annual horizon, and conduct two different, widely used, tests of cognitive ability. We find that lower cognitive ability is associated with greater risk aversion, and more pronounced impatience. These relationships are significant, and robust to controlling for personal characteristics, education, income, and measures of credit constraints. We perform a series of additional robustness checks, which help rule out other possible confounds.
Economic analysis has so far said little about how an individual's cognitive skills (CS) are related to the individual's economic preferences in different choice domains, such as risk taking or saving, and how preferences in different domains are related to each other. Using a sample of 1,000 trainee truckers we report three findings. First, there is a strong and significant relationship between an individual's CS and preferences. Individuals with better CS are more patient, in both short- and long-run. Better CS are also associated with a greater willingness to take calculated risks. Second, CS predict social awareness and choices in a sequential Prisoner's Dilemma game. Subjects with better CS more accurately forecast others' behavior and differentiate their behavior as a second mover more strongly depending on the first-mover's choice. Third, CS, and in particular, the ability to plan, strongly predict perseverance on the job in a setting with a substantial financial penalty for early exit. Consistent with CS being a common factor in all of these preferences and behaviors, we find a strong pattern of correlation among them. These results, taken together with the theoretical explanation we offer for the relationships we find, suggest that higher CS systematically affect preferences and choices in ways that favor economic success.
ABSTRACT : This paper looks at how well Finland performs in high growth entrepreneurship and uses data from the Global Entrepreneurship monitor to benchmark Finland against other European countries. It is found that Finland’s prevalence rate of high growth entrepreneurial activity lags significantly behind most of its European and all of its Scandinavian peers. That this weak performance in high-growth entrepreneurship goes hand in hand with Finland being a world leader in per capita investment in R&D may be described as a paradox. The reasons underlying the underperformance of Finland remain however unclear. At this point, explanations should be sought in culture, industrial traditions and systemic experience in high growth entrepreneurship.
Using a sample of forty-nine countries, the authors show that countries with poorer investor protections, measured by both the character of legal rules and the quality of law enforcement, have smaller and narrower capital markets. These findings apply to both equity and debt markets. In particular, French civil law countries have both the weakest investor protections and the least developed capital markets, especially as compared to common law countries. Coauthors are Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny. Copyright 1997 by American Finance Association.
This paper introduces a three-item "Cognitive Reflection Test" (CRT) as a simple measure of one type of cognitive ability--the ability or disposition to reflect on a question and resist reporting the first response that comes to mind. The author will show that CRT scores are predictive of the types of choices that feature prominently in tests of decision-making theories, like expected utility theory and prospect theory. Indeed, the relation is sometimes so strong that the preferences themselves effectively function as expressions of cognitive ability--an empirical fact begging for a theoretical explanation. The author examines the relation between CRT scores and two important decision-making characteristics: time preference and risk preference. The CRT scores are then compared with other measures of cognitive ability or cognitive "style." The CRT scores exhibit considerable difference between men and women and the article explores how this relates to sex differences in time and risk preferences. The final section addresses the interpretation of correlations between cognitive abilities and decision-making characteristics.
This paper discusses the discounted utility (DU) model: its historical development, underlying assumptions, and "anomalies"--the empirical regularities that are inconsistent with its theoretical predictions. We then summarize the alternate theoretical formulations that have been advanced to address these anomalies. We also review three decades of empirical research on intertemporal choice, and discuss reasons for the spectacular variation in implicit discount rates across studies. Throughout the paper, we stress the importance of distinguishing time preference, per se, from many other considerations that also influence intertemporal choices.
Do well-functioning stock markets and banks promote long-run economic growth? This paper shows that stock market liquidity and banking development both positively predict growth, capital accumulation, and productivity improvements when entered together in regressions, even after controlling for economic and political factors. The results are consistent with the views that financial markets provide important services for growth and that stock markets provide different services from banks. The paper also finds that stock market size, volatility, and international integration are not robustly linked with growth and that none of the financial indicators is closely associated with private saving rates. Copyright 1998 by American Economic Association.
We describe the theory and practice of real GDP comparisons across countries and over time. Version 8 of the Penn World Table expands on previous versions in three respects. First, in addition to comparisons of living standards using components of real GDP on the expenditure side, we provide a measure of productive capacity, called real GDP on the output side. Second, growth rates are benchmarked to multiple years of cross-country price data so they are less sensitive to new benchmark data. Third, data on capital stocks and productivity are (re) introduced. Applications including the Balassa-Samuelson effect and development accounting are discussed.
This article arises from two related research programs. One examines the relationship between financial development and economic growth. The basic conclusion from this work is that countries that experience greater financial development also experience faster rates of economic growth and higher levels of income per capita (King and Levine 1993a, 1993b; Levine and Zervos 1998; Rousseau and Wachtel 1998; Levine et al. 2000; and Levine 2003). Under this umbrella also are studies that test for the role of property rights and regulation on financial development. Shehzad and De Haan (2008) find that financial liberalization — a reduction in regulations — reduces the probability of a banking crisis and, therefore, promotes economic growth. Baier et al. (2012) find that countries with relatively low levels of regulation — more economic freedom — are less likely to experience a financial crisis in the near future (five years out) than countries with more regulation. Like De Haan et al. (2009), Baier et al. find that in the period immediately following a crisis there generally is a diminution of economic freedom that stems from increased regulation, portending slower economic growth in the future.The other line of research investigates the institutional sources of economic growth. In addition to physical and human capital, researchers have considered a number of institutional factors as diverse as colonial background and religious preferences (overviews can be found in Sala-i-Martin 2002, Barro and Sala-i-Martin 2004, and Loayza and Soto 2002). A number of studies also have employed indexes of economic freedom to proxy for the socio-economic institutions that may affect economic growth. The weight of evidence from this work suggests that countries with higher levels of economic freedom experience faster economic growth (Gwartney et al. 2006, Weede and Kampf 2002, Weede 2006).The question addressed in this article is whether greater economic freedom leads to a higher level of financial development. While there is evidence that more economic freedom is associated with improvements in credit allocation at the micro level (Hartarska and Nadolnyak 2007, Crabb 2008, Enowbi-Batuo and Kupukile 2009) and to better sovereign credit ratings (Roychoudhury and Lawson 2010), there does not appear to be any study that explicitly tests for the link between economic freedom and financial development.
We examine the correlations between the national IQs of Lynn and Vanhanen (Lynn, R. and Vanhanen, T. (2002). IQ and the wealth of nations. Westport, CT: Praeger. Westport, CT: Praeger, Lynn, R. and Vanhanen, T. (2006). IQ and global inequality. Athens, GA: Washington Summit Books.) and educational attainment scores in math and science for 10- and 14-year olds in 25 countries and 46 countries (respectively) given in the TIMSS 2003 reports. It was found that national IQs had (attenuation corrected) correlations of between 0.92 and 1.00 with scores in math and science. The results are interpreted as a validation of the national IQs. They suggest that national differences in educational attainment may be attributable to differences in IQ, or alternatively that national IQs and in educational attainment are both indicators of the mental ability of national populations. It is also shown that national IQs are positively associated with national per capita income (r = .61). It is proposed that these have a reciprocal positive feedback relationship such that each augments the other.
International cognitive ability and achievement comparisons stem from different research traditions. But analyses at the interindividual data level show that they share a common positive manifold. Correlations of national ability means are even higher to very high (within student assessment studies, r = .60–.98; between different student assessment studies [PISA-sum with TIMSS-sum] r = .82–.83; student assessment sum with intelligence tests, r = .85–.86). Results of factor analyses indicate a strong g-factor of differences between nations (variance explained by the first unrotated factor: 94–95%). Causes of the high correlations are seen in the similarities of tests within studies, in the similarities of the cognitive demands for tasks from different tests, and in the common developmental factors at the individual and national levels including known environmental and unknown genetic influences. Copyright © 2007 John Wiley & Sons, Ltd.
The response deals with several controversial issues: theoretical concepts of cognitive abilities, their cultural relativity in definition or level, the meaning and validity of national cognitive ability, methodological questions like the ecological fallacy, the variance of intelligence at different levels of observation, multi-level analysis, the correctness and importance of levels of analysis in cognitive-ability research, the aggregation and adjustment process, and the similarities of different cognitive assessment approaches. Central to this research are questions of causality (the causes and consequences of national cognitive-ability homogeneity and level), of malleability of these levels, and of ethical and political consequences of intelligence research. Copyright © 2007 John Wiley & Sons, Ltd.
Delay discounting (DD), the tendency to prefer smaller, sooner rewards to larger, later ones, is an important indicator of self-control. Assessments of DD superficially require individuals to make choices based on motivational processes. However, several lines of evidence suggest that DD may be systematically related to cognitive ability. We sought to provide a definitive assessment of the relation between DD and intelligence via quantitative research synthesis. A comprehensive literature search in two electronic databases yielded 24 eligible studies with 26 effect sizes in total. Meta-analysis revealed that, across studies, higher intelligence was associated with lower DD (random effects model weighted mean r = − 0.23). Studies using reward schemes in which payoffs were subject to chance (i.e., involving either a chance of receiving one choice or random selection of one choice) showed weaker associations between DD and intelligence than did studies in which payoffs were all hypothetical or all real. Other moderator analyses revealed no influence of DD measure, DD choice paradigm, or intelligence type. There was no evidence of publication bias. Given clear evidence for a negative relation between DD and intelligence, investigating the processes that support or moderate this relation would be worthwhile.
On the basis of several reviews of the literature, Lynn [Lynn, R., (2006). Race differences in intelligence: An evolutionary analysis. Augusta, GA: Washington Summit Publishers.] and Lynn and Vanhanen [Lynn, R., & Vanhanen, T., (2006). IQ and global inequality. Augusta, GA: Washington Summit Publishers.] concluded that the average IQ of the Black population of sub-Saharan Africa lies below 70. In this paper, the authors systematically review published empirical data on the performance of Africans on the following IQ tests: Draw-A-Man (DAM) test, Kaufman-Assessment Battery for Children (K-ABC), the Wechsler scales (WAIS & WISC), and several other IQ tests (but not the Raven's tests). Inclusion and exclusion criteria are explicitly discussed. Results show that average IQ of Africans on these tests is approximately 82 when compared to UK norms. We provide estimates of the average IQ per country and estimates on the basis of alternative inclusion criteria. Our estimate of average IQ converges with the finding that national IQs of sub-Saharan African countries as predicted from several international studies of student achievement are around 82. It is suggested that this estimate should be considered in light of the Flynn Effect. It is concluded that more psychometric studies are needed to address the issue of measurement bias of western IQ tests for Africans.
We present a simple model of an entrepreneur going public in an environment with poor legal protection of outside shareholders. The model incorporates elements of Becker's (J. Political Econ. 106 (1968) 172) “crime and punishment” framework into a corporate finance environment of Jensen and Meckling (J. Financial Econ. 3 (1976) 305). We examine the entrepreneur's decision and the market equilibrium. The model is consistent with a number of empirical regularities concerning the relation between investor protection and corporate finance. It also sheds light on the patterns of capital flows between rich and poor countries and on the politics of reform of investor protection.
How do financial systems affect economic growth? We construct an endogenous growth model in which financial systems evaluate prospective entrepreneurs, mobilize savings to finance the most promising productivity-enhancing activities, diversify the risks associated with these innovative activities and reveal the expected profits from engaging in innovation rather than the production of existing goods using existing methods. Better financial systems improve the probability of successful innovation and thereby accelerate economic growth. Similarly, financial sector distortions reduce the rate of economic growth by reducing the rate of innovation. A broad battery of evidence suggests that financial systems are important for productivity growth and economic development.
Solow's growth model is further augmented to include IQ in addition to proxies for education and health. The estimates indicate that IQ variable greatly erodes the size and significance of education and health parameters and dominates even a measure of institutional quality.
This paper presents a parameter covariance matrix estimator which is consistent even when the disturbances of a linear regression model are heteroskedastic. This estimator does not depend on a formal model of the structure of the heteroskedasticity. By comparing the elements of the new estimator to those of the usual covariance estimator, one obtains a direct test for heteroskedasticity, since in the absence of heteroskedasticity, the two estimators will be approximately equal, but will generally diverge otherwise. The test has an appealing least squares interpretation.
In his comment on our literature review of data on the performance of sub-Saharan Africans on Raven's Progressive Matrices, Lynn (this issue) criticized our selection of samples of primary and secondary school students. On the basis of the samples he deemed representative, Lynn concluded that the average IQ of sub-Saharan Africans stands at 67 when compared to UK norms after a correction of the Flynn Effect. We criticize his methods for being unsystematic. Here we select only those samples that were based on stratified or clustered random sampling and were deemed representative by the original authors. We again fail to replicate Lynn's low estimate of the average IQ of Africans. We argue that these scores are hard to interpret in terms of latent cognitive variables such as g because of the psychometric incomparability we established and because the Flynn Effect has yet to take hold in sub-Saharan Africa.
This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection as well as empirical evidence on the effects of patent rights. Then, the second part considers the international aspects of IPR protection. In summary, this paper draws the following conclusions from the literature. Firstly, different patent policy instruments have different effects on R&D and growth. Secondly, there is empirical evidence supporting a positive relationship between IPR protection and innovation, but the evidence is stronger for developed countries than for developing countries. Thirdly, the optimal level of IPR protection should tradeoff the social benefits of enhanced innovation against the social costs of multiple distortions and income inequality. Finally, in an open economy, achieving the globally optimal level of protection requires an international coordination (rather than the harmonization) of IPR protection.
We examine the effect of securities laws on stock market development in 49 countries. We find almost no evidence that public enforcement benefits stock markets, and strong evidence that laws facilitating private enforcement through disclosure and liability rules benefit stock markets.
This paper examines the nature of links between the intensity of financial intermediation and economic performance that operated in the United States, the United Kingdom, Canada, Norway, and Sweden over the 1870-1929 period. After describing the coevolution of the financial and real sectors in these countries, vector error correction models (VECMs) establish the quantitative importance of long-run relationships among measures of financial intensity and real per capita levels of output and the monetary base. Granger causality tests then suggest a leading role for the intermediation variables in real sector activity, while feedback effects are largely insignificant. The results suggest an important role for intermediation in the rapid industrial transformations of all five counries.
Human capital plays an important role in the theory of economic growth, but it has been difficult to measure this abstract concept. We survey the psychological literature on cross-cultural IQ tests and conclude that intelligence tests provide one useful measure of human capital. Using a new database of national average IQ, we show that in growth regressions that include only robust control variables, IQ is statistically significant in 99.8% of these 1330 regressions, easily passing a Bayesian model-averaging robustness test. A 1 point increase in a nation’s average IQ is associated with a persistent 0.11% annual increase in GDP per capita. Copyright Springer Science + Business Media, Inc. 2006
Standard indicators of human capital endowment — like literacy, school enrollment ratios or years of schooling — suffer from a number of defects. They are crude. Mostly, they refer to input rather than output measures of human capital formation. Occasionally, they produce implausible effects. They are not robustly significant determinants of growth. Here, they are replaced by average intelligence. This variable consistently outperforms the other human capital indicators in spite of suffering from severe defects of its own. The immediate impact of institutional improvements, i.e., more government tolerance of private enterprise or economic freedom, on growth it is in the same order of magnitude as intelligence effects are.
The senior author is responsible for picking a ‘politically incorrect’ topic, i.e., analyzing the impact of IQ or average intelligence. The junior author has done the data compilation and the computations.
Since 1996, the Economic Freedom of the World (EFW) reports have presented an index that measures the consistency of a nation's policies and institutions with economic freedom. The key ingredients of economic freedom are personal choice, voluntary exchange, freedom to compete, and protection of person and property. Earlier versions of the EFW index have been based almost exclusively on objective quantifiable data. However, some important elements of economic freedom, particularly those dealing with property rights and regulatory restraints, are difficult to capture with objective measures. This paper integrates survey data on legal structure and government regulation into the EFW index and uses it to develop a more comprehensive measure of economic freedom.