Nature vs. nurture: Genes play a leading role in financial behavior

Bull, bear or barely aware of alternatives to the trusty savings account. What are the primary forces that shape each person’s financial behavior? Are investors born or made?

A new study by researchers at the University of Washington Foster School of Business and Claremont McKenna College finds that simple genetic variations explain a major portion of an individual’s investing behavior, eclipsing the negligible impact of environment and overshadowing the role of age, gender, wealth and education. In economic matters, nature trumps nurture almost completely.

“People assume that investing is mainly an information or cultural issue, where the parenting environment matters a lot,” says co-author Stephan Siegel, an assistant professor of finance at the Foster School. “But we find that the impact of parental guidance on financial behavior weakens significantly as a person matures, while the effect of his or her genetic makeup persists throughout life.”

Twin truths

For the study, Siegel and co-authors Amir Barnea and Henrik Cronqvist cross-referenced nearly 38,000 twins in the Swedish Twin Registry (the world’s largest) with comprehensive personal financial data—stocks, bonds, real estate, cash—collected by the Swedish government prior to the 2006 abolition of its wealth tax. This data set-of-dreams yielded a robust measure of genetic versus environmental impact on investing and personal finance.

To discern genetic 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 indicates a significantly higher correlation between identical twins (who share 100 percent of genetic material) than non-identical twins (who, on average, share 50 percent of genetic material). Correlation of a random sample of the population is close to zero.

This stark difference between the identical and non-identical twins relative to the general population is strong evidence that investing behavior is, at least in significant part, hereditary. To put it into perspective, while previously studied factors such as age, gender, education, wealth and home ownership together explain only five to 10 percent of investor behavior, Siegel says that genetic variations account for one-third, on average, and as much as 45 percent.

Further evidence

Separating the twin population into age groups demonstrated that genetic influence does not disappear with age and the acquisition of personal experiences. A common familial environment did have a limited impact on the financial behavior of young twins, but that impact disappeared as individuals aged—unless they remained in close contact, creating a new common environment.

Finally, the researchers considered 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 genetic drivers of investor behavior are both influential and ever-present, from first job to last will and testament. “We find that a simple genetic factor explains much more than everything else that people have proposed to explain the difference in investor behavior,” Siegel says. “Genes matter all the time, even in old age.”

He concedes that the findings can be difficult to accept—even by the study’s authors. “Education, and financial education in particular, can be limited by the fact that people have strong genetic predispositions for one behavior versus another,” he says. “I would not go so far as to say that education and parenting are ineffective in molding investor behavior, because a substantial part of it is personal and idiosyncratic. It’s also possible that there are important genetic-environment interactions that we cannot capture.”

“But as far as we can see, nurture or parenting are not major components in determining an individual’s investing behavior. There is always going to be some part of you that is predetermined at the moment you are born. And this also affects the way that you invest.”

“Nature or Nurture: What Determines Investor Behavior?” is published in the Journal of Financial Economics.

In a follow-on paper, “The Origins of Savings Behavior,” Siegel and Cronqvist find that genetic variation explains about 33 percent of a person’s savings behavior. Again, the effect of parenting appears to diminish completely as a person ages from early adulthood to middle age.