Does having a high IQ score help in picking good investments? The answer, according to a paper published in a recent issue of The Journal of Finance, is a qualified yes.

The study is certainly provocative. Even after taking into account factors like income and education, the authors concluded that people with relatively high IQs typically diversify their investment portfolios more than those with lower scores and invest more heavily in the stock market. They also tend to favour small-capitalisation stocks, as well as companies with high book values relative to their share prices.

The results are that people with high IQs build portfolios with better risk-return profiles than their lower-scoring peers. Certainly, caution is needed here. IQ tests are controversial as to what they measure, and factors like income, quality of education and family background may not be completely controlled for. But the study’s results are worth pondering for their possible implications.

The paper, by Mark Grinblatt of the University of California, Los Angeles, Matti Keloharju of Aalto University in Helsinki and Juhani Linnainmaa of the University of Chicago, took advantage of some unusual data. The crucial numbers came from, of all places, Finland.

Why there? Two reasons. First, Finland requires all able young men to perform military service. As a result, the authors were able to obtain IQ test scores of all of men conscripted in Finland from 1982 to 2001.

Second, Finland had a wealth tax, and its citizens had to report their investment portfolios to the government. This means the authors could compare the men’s IQ scores and their investing habits, as well as link those factors to other individual data. Similar data sets aren’t available in other countries, however, so we may not want to generalise too much.

Still, the results are interesting. The authors didn’t claim that people with high scores had some kind of monopoly on stock-picking genius. What they did contend was that these people tended to follow basic rules of successful investing.

In some ways, it’s a puzzle why IQ scores would matter in this regard. After all, the view that people should diversify their investments, to avoid putting all their eggs in one basket, is widely accepted. It’s not hard to diversify a portfolio or to have someone do it for you.

And another time-proven rule of investing — that people should put a substantial amount of their money in the stock market — might have its detractors, no matter what their IQ. That is especially possible given the volatility in the financial markets.

Yet only about half of all American adults have money in the stock market, directly or indirectly. So maybe something else is going on. If people can’t figure out the financial markets on their own, they can entrust their money to professionals or heed professional advice. The real problem may not be that many people lack investing savvy or smarts. Perhaps they lack confidence in whom to trust.

Three economists, Luigi Guiso of the Einaudi Institute for Economics and Finance, Paola Sapienza of Northwestern and Luigi Zingales of the University of Chicago, argued in a paper published in 2008 that many households avoid investing directly in stocks out of vague fears that they might be deliberately misled. Using results from a survey of households, this time in the Netherlands, the economists showed that those who indicated a high level of trust were 50 per cent more likely to invest in the stock market. They were also more likely to have diversified their stock holdings. The paper, titled Trusting the Stock Market, was published in The Journal of Finance.

Knowing whom to trust, is itself an aspect of intelligence. Guiso and his co-authors cited research that suggested that investment decisions relied significantly on a part of the brain called the Brodmann area 10. This region of the frontal cortex is believed to be associated with our ability to make inferences about others’ preferences and beliefs based on their actions. Such social intelligence seems to reward some people more than others with an ability to put standard investment advice into practice.

Successful investing requires that we judge other people, and it relies on an ability to develop a good model of others’ minds. It requires that we put into perspective recent angry rhetoric against Wall Street and understand that, while some criticisms are surely justified, others are just as surely exaggerated.

Anyone, regardless of background or education, may worry about being misled. The professionals tell us that the stock market is the best place to invest, but such assurances don’t help us when the market swoons. Many pros assured us that housing prices would never decline, either.

But if we can somehow foster more trust in investment professionals, a full spectrum of people — whatever their IQs — might adopt a more successful approach toward investing.