Why Dumb People Earn More Than Smart People (And What You Can Do About It)

A recent study published in the Journal of Economics and Business made waves in the media when it revealed that the highest income earners actually have lower intelligence on average than those right below the top. 

At first glance, this seems to turn conventional wisdom on its head and suggest that being less intelligent can somehow make you richer. But as with most counterintuitive statistics, the full story behind the headlines is much more nuanced.

While luck and connections certainly play a role, your underlying level of intelligence does substantially impact your earning potential over a career. However, being moderately intelligent coupled with high ambition and drive seems to provide the ‘goldilocks zone’ balance for building immense wealth. 

Let’s explore the key reasons why the study showed dumb people earning more, why highly intelligent people can miss out on top incomes, and most importantly, what lessons we can take away to maximize our own income and net worth over time.

Why The Study Showed Dumb People Earn More 

The eye-catching study originally referenced came out of Sweden and drew on data from 59,000 men who took a compulsory military conscription aptitude test at age 18, which measured cognitive and logical abilities. The researchers then tracked these individuals’ income levels over their ensuing professional careers using tax data.

Here were the key findings from the study:

– There was a strong correlation between intelligence as measured by the test and income earned, but only up to about 600,000 Swedish Krona per year, or approximately $64,000 USD. 

– After $64,000 annually, intelligence mattered much less in predicting how high someone’s income went.

– At the very top end of the income spectrum, such as the top 1% of earners, those individuals actually had lower average intelligence than those in the income brackets directly below the top.

At first glance, these findings seem to suggest counterintuitively that having lower innate intelligence somehow provides an advantage or edge when it comes to earning the very highest incomes. But the reality behind the statistics is far more nuanced. 

Here are some of the limitations of the study design that help explain the unexpected findings:

The Ceiling Effect of Test Scores

Standardized test scores have an inherent ceiling effect. No matter how exceptionally intelligent or capable a test taker is, they cannot score higher than 100%, which is the maximum possible score. This ceiling effect issue comes into play in the income data from the study as well. 

The reported incomes only went up to the top 1% income threshold, which creates another type of ceiling. So those that had incomes at the very top likely included both highly intelligent top earners along with those that were not necessarily intelligent but simply had incomes that got ‘stuck’ at the top, which brings down the average.

For example, individuals like the Kardashians likely have below average intelligence, yet have managed to earn huge incomes from their celebrity status that qualifies them for the ‘top 1%’ designation. Their ultra-high incomes get stuck at the ceiling of the top 1%, which drags down the average intelligence calculated for that group as a whole.

Survivorship Bias Skews Results

Another key factor is that the published study results only reflect the individuals who succeeded in earning a high income, without taking into account the far greater number of people who tried but failed to reach top earnings thresholds. This creates what statisticians call survivorship bias.

Logically, someone of lower or average intelligence is statistically more likely to fail in their attempts at pursuing the high risk, high reward path of starting their own business, as opposed to someone with greater intelligence. 

However, if that person of average intelligence manages to beat the odds and succeeds in building a profitable business, they can readily earn a ‘top 1%’ level income from their entrepreneurial efforts. Meanwhile, the much larger number of failed business attempts by people of average intelligence are not reflected in the published data, since it only counted those who succeeded.

This survivorship bias results in over-representation of the few successful ‘survivors’ at the top income brackets, skewing the results to show a lower average intelligence than may exist for that actual group.

Apples to Oranges Comparisons 

An additional limitation is the study was conducted solely on Swedish men who took this particular military entrance exam. Sweden has a significantly different income distribution, workforce composition, cultural attitudes toward careers and business, and social programs than the United States or most other western countries. 

Sweden also has nearly twice the startup business formation rate per capita than the United States, so becoming a successful entrepreneur is a far more viable path in Sweden compared to other countries. And obviously excluding half the population, women were left out of the dataset entirely.

So while interesting, the study does not provide an apples-to-apples comparison that readily translates to income dynamics or career choice considerations in other countries for both genders. 

Why Highly Intelligent People Can End Up Earning Less

While the top income earners overall still skew heavily towards above average in innate intelligence, there are some good reasons why those on the extreme right tail of the intelligence spectrum can actually end up earning less over a career than business founders of more moderate intelligence.

Prestige Careers Have Lower Pay Ceilings

Many of the most prestigious and respected career paths – such as doctors, lawyers, academics, scientists, researchers, and scholars – require extremely high intelligence just to be able to enter and sustain success in those fields. 

But the pay ceilings of even the most esteemed positions in those intelligent careers still max out below 8 figures a year. For example, the very highest paid specialty physicians may earn up to $1 million annually, while top lawyers may bill $2 million. 

These are certainly impressive incomes earned by extremely smart professionals. But the pay ceilings fall far below the $10+ million, $20+ million, or even $100+ million annual incomes that successful entrepreneurs or corporate executives can accrue from either building their own companies or rising to the highest ranks of organizations.

So while the smartest members of society tend to gravitate towards and dominate these prestigious vocations, the income potential hits a ceiling much lower than what business founders can make if their ventures become highly successful.

Risk Aversion of the Highly Intelligent

Starting and building a business capable of generating ultra-high incomes of millions or billions is also inherently extremely high risk. People who choose to leave successful established careers to start businesses face giving up their steady income, risking significant capital, and only have a small chance of reaching those top income brackets.

Intelligent individuals already earning healthy six figure or low seven figure incomes as specialized doctors, lawyers, engineers, academics, etc. have less incentive to leave their successful careers and take the huge risks of entrepreneurship. They have more to lose if the business fails or struggles.

Meanwhile, those with more moderate intelligence often have fewer career options available to reach top tier incomes outside of starting their own business. Even if the business is high risk, the potential reward of millions in income motivates them strongly to try and beat the odds. So out of ambition, they are more likely to attempt starting a business in order to try and reach the highest income echelons.

Smaller Population Size

There are simply far fewer individuals on the extreme right tail of the intelligence and aptitude spectrum than there are people of moderate or average intelligence in the general population. 

So even if 1% of each group succeeds at starting a business that reaches multi-million dollar revenue scale, there will be far more total people from the moderate intelligence cohort who make that threshold compared to the highly intelligent cohort, simply due to much larger overall population size.

Coupled with some highly intelligent people gravitating away from business and the lower risk appetite, this population dynamic means more moderately intelligent people will ‘survive’ and be represented among the ranks of top earning business founders than highly intelligent people.

Key Takeaways – How To Maximize Your Own Income Potential

While luck, connections, and demographics all play a role in shaping income outcomes, it’s important to remember you’re not completely powerless over your own financial destiny. Here are a few key steps you can take to maximize your own income and net worth potential over the course of your life and career:

Assess your abilities honestly. Resist the natural temptation to overestimate your own skills and abilities. Take an objective look at your strengths but also your weaknesses and limitations so you can set a career trajectory that plays to your innate talents.

Choose careers and pursuits that maximize your talents. Given your honest self-assessment, pick career paths and jobs that cater best to the areas you excel at, whether those happen to be fields like academia and research that reward raw intelligence or capacity for business building and value creation.

Continuously develop in-demand skills. In whatever field you choose, relentlessly build up your experience, network, skills and qualifications to become a stand-out top performer, innovator and domain expert. Keep gaining rare and valuable knowledge to set yourself apart. 

Take calculated, asymmetric risks. Don’t be paralyzed by fear of failure and risk aversion, but also don’t quit a good job recklessly without a plan. Look for smart ways to take calculated risks like starting a side business while keeping your day job at first to test the waters.

Build a powerful professional network. Over the course of your career, get to know as many smart and influential people as possible. Contribute value to your network connections. When opportunities arise down the road, a strong network will be able to open doors for you.

Maintain drive and stay hungry. Don’t get complacent or lose motivation once you reach a certain level of career success. Keep setting new, bigger goals for income and impact. Find ways to continually expand your business or responsibilities.

While being moderately intelligent coupled with high ambition can certainly boost your statistical odds of entering the ranks of top income earners, don’t forget to keep your moral compass intact. 

Use any wealth and influence accumulated ethically and judiciously. Pay your employees and business partners fairly. Look for opportunities to give back and help others. Don’t feel any pressure to step on others just to continue climbing the income ladder.

Ultimately the study results shine a light on the fact you certainly don’t need to be a genius or expert in your field to find financial success in business and investment. But you do need a high degree of self-awareness, realistic assessment of your strengths, continuous skill building, and unrelenting drive and motivation.

What proactive steps will you take today based on these insights to grow your income and net worth over the long run, while avoiding getting caught up in simplistic get-rich-quick schemes? What impact do you aspire to make on the world?