Central banks cut interest rates to promote borrowing, governments provide incentive schemes for environmentally friendly cars, etc. But who does take advantage of these changing incentives? As it turns out, people with a higher IQ do.
Finland provides fertile ground for research on intelligence. All men are subject to military conscription and part of the conscription process is a 120-question test of cognitive abilities (i.e., an IQ test). Meanwhile, Finnish tax forms are pretty detailed, and surveys allow researchers to test consumer choices and then pair them with the IQ data of the men in the survey.
Maritta Paloviita from the Bank of Finland and her colleagues used this data treasure to check how people of different IQ levels react to incentives. They used two examples, the Finnish equivalent of the “cash for clunkers” programme which in 2015 provided households with a government incentive to sell older cars and replace them with newer, less polluting cars, and the reduction in borrowing rates by the ECB during the 2010s.
Of course, replacing an existing car with a newer one requires the capital and income to do so. Hence, the study did control for household income, education, etc. Yet, as the charts below show, people with higher IQ (high IQ is defined as men scoring in the top third of the military IQ test) tend to react more to the government incentive to replace cars than the rest of the population. Indeed, the “low IQ group” (I apologise for the somewhat offensive labelling by the researchers) hardly reacted to the government incentives.
Cognitive abilities and reaction to government incentive scheme
Source: D’Acunto et al. (2023)
Similarly, the researchers could show that in reaction to lower interest rates by the ECB, people in the higher IQ group increased their borrowing to take advantage of the lower cost of debt, while most households did not.
This shows two things that are important for policy makers and businesses alike. First, it shows that incentives don’t work equally well for all people. It takes some thought to understand incentives and how to use them to your advantage and many people just are unwilling or unable to put that mental work in, thus missing out on opportunities presented to them.
Second, it shows us that incentive schemes – whether they are government incentive schemes or business incentive schemes like loyalty cards – have to be designed to be as easy to understand as possible, so that the largest group of people can understand them without too much thought. In fact, the best incentive scheme is an automatic one where the customer doesn’t have to do anything or think about anything.
I wonder what our modern educational systems have to do with it - at least partially. In the Netherlands education has been long the vehicle for social democrats to 'improve' the outcomes of the working class. ('Everybody in an office!' I wonder if these neat leftists will ever understand that they've been signalling disregard/disrespect for old school 'work' i.e. dong stuff, making stuff, transporting stuff etc).
With fancy crap taking the place of more traditionally rigorous school work the past 30, 40 years, these days decimals of Dutch vocational students leave school not being able to understand the meaning of the manuals of the products they're (a.o. things) supposed to be selling, advicing on, or repairing...