Smart money: innate ability, education, and the unequal returns to wealth

Speaker: Prof. Siyu Chen

Venue: Room 618, Building of School of economics, Zijingang Campus

Abstract: We examine whether investment performance reflects educatable skill or innate ability. Linking China's national college entrance examination (CEE) records (1999-2003 cohorts) to ten years of detailed stock brokerage transactions (2014-2023), we find no significant effect of higher education or financial training on investor performance: elite college graduates and economics majors earn similar returns, Sharpe ratios, and risk profiles as their near-miss counterparts. In contrast, conditional on a rich set of fixed effects, CEE rank, a proxy for innate cognitive ability, strongly predicts portfolio returns. A ten-percentile improvement in CEE rank raises monthly portfolio returns by about 0.05 percentage points, which compounds substantially: investors in the top quartile of CEE rank realize roughly 61 percent higher total returns over ten years than those in the bottom quartile. High-ability investors select higher-ROA, lower-risk stocks, trade less frequently, and engage financial advisors more rationally and less overconfidently. Our results suggest that heterogeneity in returns to wealth largely reflects ability rather than educational credentials.