Are Really Smart People Able to Avoid Dumb Financial Mistakes?

A few years ago I published a research paper entitled “Do you have to be smart to be rich? The impact of IQ on wealth, income and financial distress” in the journal Intelligence.  The finding was that there was no relationship between IQ and a person’s net worth.  A slightly longer summary is found by clicking here and the full paper is found by clicking here.  Since writing this paper I have been fascinated by the question “Are really smart people able to avoid dumb financial mistakes?”

My research paper showed for a broad swath of society being smarter did not ensure a person was wealthier.  However, data I used had only a few extremely smart people.  Since writing the paper I have searched for stories of how the very smartest people in the world have done financially.  So far the stories suggest even the world’s greatest geniuses have made horrendous financial decisions.

This blog post is devoted to the story of John Maynard Keynes.  Lord Keynes was an amazing Englishman who was famous during World War I and II.  He created the field of macroeconomics during the Great Depression.  Keynesian economics is named after him.  At the end of World War II he created the modern international financial system (called the Bretton Woods system), which resulted in organizations like the IMF and World Bank, plus years of steady growth in international trade.

Understanding various aspects of Keynes’ life is relatively simple since Lord Keynes kept most of his notes, letters, memos and books for posterity.  Most interestingly for this blog post, he kept careful financial records and each year calculated his wealth by recording his assets and liabilities.  A table of his yearly financial position is found below.

KeynesNetWorrthTable2

The table shows that Keynes went broke once and almost went broke a second time, just a decade later.  In 1919, Keynes had a net worth of 16,000 British Pounds, which according to the Bank of England would be worth about 700,000 Pounds or over 1 million US dollars today.  In 1920 after speculating in the foreign exchange market Keynes was in debt by about $100,000 in today’s US dollars.  The man who invented macroeconomics turned a $1 million fortune into a $100,000 loss in just a few months.

Keynes regained his fortune by 1924.  After adjusting the money into today’s terms Keynes was worth about 3.3 million pounds, or about $5 million in today’s US dollars by the end of 1924.  However, by 1929, just five years later, this huge fortune was whittled away.  Keynes lost almost 90% of his wealth between 1924 and 1929.  Moreover, much of the money was lost well before the famous 1929 stock market crash, so the Great Depression cannot be blamed.  Lord Keynes’ life shows even a really smart person, who was one of the world’s greatest economists, was unable to avoid making financial mistakes.

If this brilliant economist could make such disastrous mistakes in his personal finances, should we berate ourselves when our own wealth falls dramatically?  One bright point can be seen in the table of Keynes’ net worth: he regained his wealth after each setback.