There are many reasons why you get paid more in finance than in other industries, but your superior intelligence is probably not one of them. So says a new study of Swedish finance professionals published by the UK’s Centre for Economics and Policy Research.
Sweden isn’t known for its large population of finance workers, but it does have something many other countries lack: standardized cognitive and non-cognitive test scores for 18 or 19-year-old Swedish men going into military service. Academics at the Stockholm School of Economics and the University of Bonn matched this data to the men’s subsequent choice of professions and came up with some unexpected results.
Firstly, they found that the share of people with the very highest level of intelligence (“level 9”) was twice as high in computing and in the combined professions of law, consulting and accounting as in finance. Secondly, they found that the proportion of people with some of the highest levels of intelligence (levels 7 and 8) who work in finance fell between 1990 and 2014, while the proportion of people with intelligence level five increased in the industry, particularly between 1995 and 2000.
Of course, not all finance jobs are equal and not everyone in banking is a banker. When the academics looked at particular areas of finance and split out “securities and finance dealers and brokers” as a distinct subcategory, they found that people here were more intelligent than those in other jobs, but not especially so. As the chart below shows, lawyers, “business professionals” and “finance and administration managers” are, on average, more intelligent than these markets professionals. On the other hand, “banking associate professionals” (retail bankers) and insurance reps lower the average intelligence score for the finance sector as a whole.
The Swedish researchers’ findings echo those of a Harvard University study of MIT students in 2016, which found that the top students were avoiding finance, and that the industry was instead more likely to attract MIT students from the lower academic quartiles – in other words academically average frat boys.
Despite finding little evidence that people in finance are more intelligent than others, or that their intelligence has increased over time, the Swedish researchers noted that people in finance are paid a lot and that their compensation has risen in relation to other industries. In 1990, for example, Sweden’s finance employees were paid 120% average private sector earnings; by 2014 this had risen to almost 170%.
Why is this? The Swedish researchers point variously to rent sharing (distributing excess profits to workers regardless of workers’ productivity) and to barriers to entry in the form of family connections. Among their own study group, having a father or mother who worked in finance increased the chance of a student getting into the industry by 100%.
Of course, finance employees may be becoming more intelligent, and the industry may be becoming more democratic in the process. A study last year by Douglas Coate, professor of economics at Rutgers University, found that banks in the U.S. now hire comparatively few of the archetypal “jocks” who played varsity sports onto their graduate programmes. At the time, it was supposed that this was because banks are hiring in more quants and PhDs.
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