A Family Tree Bears Roots to Investor Decisions
Since writing his Ph.D. dissertation, Henrik Cronqvist has been intrigued by the deep determinants of behavior, as they relate to investments and risk taking. So it seemed natural at some point he’d pay close attention to the influence of genes versus the environment. “After all,” Cronqvist points out, “a decomposition of behavior regarding genetic and environmental effects had already been done in many other fields, other than financial economics.” One example, he says, is how personality traits studied in psychology have led researchers to the conclusion that, yes, personality has strong ties to genetic makeup.
With Robert Day School of Economics and Finance colleague Amir Barnea (both are assistant professors of financial economics), and Stephan Siegel, assistant professor of finance at the University of Washington's Foster School of Business, Cronqvist and team have shown that the same can now be said for investment decisions and personal finance: Genes count. The trio’s study, Nature or Nurture: What Determines Investor Behavior?, cross-referenced nearly 38,000 twins in the Swedish Twin Registry, the world’s largest database of twins, with comprehensive personal financial data—stocks, bonds, real estate, cash—collected by the Swedish government. This data allowed a comprehensive method to measure genetic versus environmental impact on investing and personal finance.
“We found that genetics explains differences in investor behavior much more than everything else that economists have proposed,” says Siegel.
So far, their abstract on the research has received 1,150 views and the paper has been downloaded nearly 300 times.
W hile it wasn’t so wondrous to these researchers that heredity could affect investment behavior, the real surprise was that the gene effect was so significant. Cronqvist was amazed that it explains about one-third of the variation in investment behavior across individuals, and that genes “seem to be so much more important than standard explanations for investment behavior,” such as someone’s income and education.
Having already presented their findings to many academic institutions, “intriguing” seems to be the word that best summarizes the reactions they’ve received, Cronqvist says. “Many of our colleagues in the academic profession seem to find this work important and relevant, and they want to see more research in this area.”
“As with any research related to genes,” he notes, “there is potential for some controversy. But we were aware of that prior to embarking on this project.”
Some of the highlights of their study, Nature or Nurture: What Determines Investor Behavior?, are recounted below:
- Genetics account for one-third, on average, and as much as 45 percent of investor behavior.
- Other factors previously studied, such as age, gender, education, wealth and home ownership, when combined, explain only five to 10 percent of investor behavior.
- To separate genetics from environmental drivers of financial behavior, the researchers compared each twin pair’s stock market participation, asset allocation, and portfolio risk. In all three measures, the data showed a significantly higher correlation between identical twins than non-identical twins. This stark difference between the identical and non-identical twins relative to the general population is strong evidence that investing behavior is, in significant part, hereditary.
"We found that the correlation among twins held true, no matter what their age and life experience," Barnea says. "Although family environment has a limited impact on young twins' behavior, that disappears as they age." - The researchers also examined 716 twins from the Swedish registry who were raised apart, and found their average correlation in investing behavior to be virtually identical to those raised together, adding more evidence that genetics drives investor behavior.
“There is always going to be some part of you that is predetermined at the moment you are born, and we’re learning that the way you invest is at least partly hereditary,” Cronqvist adds.
The full study is available for download.