Wednesday, September 21, 2016

What do high income people know ?

Self-help in this age of complicated data analytics means that the advice we can get on how to conduct our lives can become very specific and very useful. This is light years ahead of the good old days where we are stuck with Dale Carnegie, Stephen Covey and, worse, Napoleon Hill if we actually try to read to improve ourselves.

William Poundstone's Head in the Clouds, can be a very disturbing read but I now view it as a compulsory read if one aspires to be a thought leader in personal finance. William's experiment is ground breaking because he invented a questionnaire which asks a series of questions on general knowledge and then he maps out the answers to a person's earned income. In many cases, he adjusted his statistical results to remove the effects of age and educational level.

What we have is a guide to what a person knows against his annual income.

I am just going to share three findings which really made me think.

a) Knowing about personal finance increases wealth and income but not dramatically.

Knowing about personal finance such as effects of compounding interest would ideally be the biggest predictor of income and wealth, but it had only a moderate effect. The income gap between a person who knows compound interest and basic personal finance is only $20,000.

b) General knowledge and in particular basic knowledge on sports has the greatest effect on income and wealth.

The biggest income gap is worth over $50,000 of annual income is general knowledge and basic knowledge on sports. The folks who can point to Kazakhstan on the map have a huge income differential against someone who could not do so. That is somehow intuitive.

What is not intuitive is that knowledge on sports also results in a dramatic difference. But the questions on sports were simple ones which well-informed persons would know such as the number of players in a soccer team.

But don't start cancelling your Economist subscription for the New Paper yet ! When Poundstone created a sports quiz for die hard fans, the income difference vanishes. I struggle with understanding result and harbour grave doubts that this will replicate in Singapore.

c) Cultural knowledge does not result in any income difference

The most hilarious result is that cultural knowledge does not result in any income advantage at all. If you know that Vladimir Nabokov is the author of the book Lolita, it does not enrich you financially in any way ! This is a mind-blowing finding which nay have repercussions on how the US would see their cultural education in the future.

The only current explanation is that the folks who have a mastery of cultural trivia tends to be lower paid than other segments of US society.

d) Open mindedness and curiosity are important traits for wealth creation.

If we are to take our findings in totality, open-mindedness and curiosity are valuable traits for wealth creation. The quiz was designed to be done well by someone who reads beyond his syllabus no matter what his educational qualifications are, which explains why general knowledge creates such a robust income difference even after adjusting for educational qualifications.

Certainly this book has changed my views on the personality traits for wealth creation.

I would place Conscientious and Open-mindedness key in my future works on Learning how to Earn.


ted said...

I'm not sure if you are over extrapolating from the findings of the book/study.
Since correlation is not causation. There might be different underlying cause factors.

I saw the book at Popular recently. Did not follow up due to unfavorable reviews on Amazon.
But due to your writing, piqued my interest to go find out exactly what he said and to see how conclusive his findings are. (Expecting association at best, doubt can prove to be causative)
(Seems like he does not have any paper published or even the test results, so all has to be taken on his word, including his interpretation of the 'statistics'...)

Point B, might be about 'networking' over sports info then the knowledge itself. Like if you talk about the sports team with your boss/clients...

Christopher Ng Wai Chung said...

The book does attempt offer some suggestions on how the results are caused.

Actually, all of these findings on similar books have a "correlation is not causation" problem.

Bapu said...

Why 'worse Napoleon Hill'. Have you blogged your thoughts on that?