Simple rule: if you're the smartest person in the room, go look for a room with smarter people in it.
On the other hand, if you have that kind of attitude it will probably be mutually beneficial if you stay the hell away from him so it's a good strategy.
If the person has a strong feeling of self worth that is independent of intelligence, they won't care very much, and so can be more objective about whether they're the smartest person in a room, regardless of if they are or aren't.
Put another way, there will undoubtedly be situations for a very high percentage of human beings where they happen to be the smartest person in the room. Being able to recognize this doesn't necessarily indicate arrogance or an inflated perception of one's intelligence.
Of course this issue is also obscured by the entirely vague and amorphous nature of the very concept of intelligence. There likely exist countless 'mentally retarded' people who have much higher emotional intelligence than a typical MIT genius, and are thereby probably better equipped for a happy, successful, and socially beneficial life.
Also, there's a difference between thinking you're smartest and knowing it. Mostly in attitude.