The genetics of investment biases

by on July 3, 2014 at 6:59 am in Economics, Science, Uncategorized | Permalink

That is a new paper by Henrik Cronqvist and Stephan Siegel, here is the abstract:

For a long list of investment “biases,” including lack of diversification, excessive trading, and the disposition effect, we find that genetic differences explain up to 45% of the remaining variation across individual investors, after controlling for observable individual characteristics. The evidence is consistent with a view that investment biases are manifestations of innate and evolutionary ancient features of human behavior. We find that work experience with finance reduces genetic predispositions to investment biases. Finally, we find that even genetically identical investors, who grew up in the same family environment, often differ substantially in their investment behaviors due to individual-specific experiences or events.

Hat tip goes to Kevin Lewis.  There is an ungated copy here.

T. Shaw July 3, 2014 at 8:21 am

Somethimes I think I have the “buy high, sell low.” Or, is it how I was raised?

Brian Donohue July 3, 2014 at 9:15 am

Investing is a process of self-discovery. No substitute for actually doing it.

Tom West July 3, 2014 at 9:58 am

Investing is a process of self-discovery.

Actually, I find it a process of discovering the universe *is* out to get me.

Willitts July 3, 2014 at 10:55 am

Buy and hold an index isnt just a strategy, it’s like building a fortress.

Michael Foody July 3, 2014 at 11:10 am

I’m curious what you mean by this. I invest at a very high rate but do so in an automated way with minimal decision making. The process feels abstract. Initially it was fun to see the number go up and worrisome to see the number fall, but since such movements are outside my agency and ultimately do not inform my behavior they’ve become little more than trivia.

Brian Donohue July 3, 2014 at 12:36 pm

Well, you can read about risk and diversification and fundamental analysis and Sharpe ratios and modern portfolio theory, but until you put some money on the line, you know nothing about the emotional impact of investment decisions. Learning how to handle the emotional ups and downs is a huge part of investing. And living through a couple of investment cycles is the only way to learn this. I think you are saying something similar.

Now if you’re buying and selling stuff every day, I’d say you’re more of a trader than an investor. Also a “learn by doing” thing, but more akin to poker skill than investing skill I think.

mpowell July 3, 2014 at 1:44 pm

I think the way you deal with the emotional impact of investing is by removing yourself from the process like Foody says. When I used to play poker winning or losing $100 or $1000 was emotionally difficult to manage properly (and continue playing well). Now? A $10,000 move doesn’t even register.

Brian Donohue July 3, 2014 at 1:53 pm

I think I’m saying something similar.

Bud Fox to Gordon Gekko: “You once told me never to get emotional about stocks.” This is learned behavior, for me anyway. Take some kicks to the stomach when you’re young and the stakes are low. What you learn about yourself will be well worth the cost down the road.

A $10,000 loss doesn’t register because you’ve been there before, you understand the caprice of the market and its irregular rhythms, and, if you’ve been doing it right, $10K isn’t that big of a deal anymore.

DR. D July 4, 2014 at 12:33 pm

To paraphrase Adam Smith in the Money Game; If you don’t know who you are, the market is an expensive place to find out.

prior_approval July 3, 2014 at 9:23 am

‘we find that genetic differences explain up to 45% of the remaining variation across individual investors’

Nature is significant.

‘We find that work experience with finance reduces genetic predispositions to investment biases.’

Nurture is important.

‘Finally, we find that even genetically identical investors, who grew up in the same family environment, often differ substantially in their investment behaviors due to individual-specific experiences or events.’

Nurture beats nature, unless this is another one of those studies preselected for wider distribution by a certain genetic predisposition. Unless they have familarity with the subject, or when genetically identical, personal experience leads to significant differences.

Roy July 3, 2014 at 9:38 am

Say I have a genetic tendency for extreme risk taking and alcoholism, but my crazy risk taking parents drove themselves into poverty by gambling so I become a devout Mormon and do neither, and most of my offspring remain diligent Mormons. Now replicate this million times and you get why these studies are way to premature. The complex interactions of genes and environment is not nearly as simple as people want to believe.

Willitts July 3, 2014 at 10:57 am

True, but I dont think anyone means genes are controling, just highly influential.

prior_approval July 3, 2014 at 12:14 pm

‘just highly influential’

Sad to say, the study disagrees – ‘Finally, we find that even genetically identical investors, who grew up in the same family environment, often differ substantially in their investment behaviors due to individual-specific experiences or events.’

Or it doesn’t – ‘we find that genetic differences explain up to 45% of the remaining variation across individual investors, after controlling for observable individual characteristics’

Actually, one could be forgiven in thinking that this study isn’t sure what it is trying to say, though whether that is due to the authorial genetics or experiences seems to be unresolvable at this point. One can safely assume, however, that more study is needed.

Mario July 3, 2014 at 11:32 am

As with all cases of statistical correlation related to genetics, I predict that the majority of your comments will be of exception to the rule, i.e. “Yeah, well my uncle is short but my cousin is TALL! The point is that you never know and absolutes are…!” I can’t even finish this…

Tiger Mike July 3, 2014 at 4:11 pm

Why haven’t I been able to convince my parents to “invest” in anything other than bank CDs?

Aaron Sheldon July 3, 2014 at 11:37 am

The authors made a passing dismissive note on the equal environment assumption, a fatal flaw in this paper. The cited EEA research was on facets that are much less cultural linked than investing. Clearly investing is a heavily cultural activity and so could be much more strongly influenced by failures of the equal environment assumption. It should be transparent that some behaviours are strongly influenced by the environment, while other behaviours are resistant to environmental variation.

The second unpleasant fudge factor that was thrown in was excluding all twins (both identical and fraternal) that had more the 50% similarity in their portfolios, under the assumption that these twins must be communicating strategies. Unless you omnibus test on the whole data set, before throwing out that much correlation, you cannot know whether or not the correlations you are seeing a spurious results from the selection criteria applied.

Unless they can study twins separated at birth, no matter what mathematical or statistical trickery is used, they will never be able to disentangle environment from genetics.

Steve Sailer July 3, 2014 at 3:53 pm

A default assumption of a 50-50 split in any nature v. nurture question is a good starting point.

gwern July 4, 2014 at 2:00 pm

Looks like people missed one of the more interesting bits: this paper, like most results, shows little shared environment:

> The C component is insignificant suggesting that upbringing or other aspects of the common environment do not affect investment biases. That is, the notion that children learn investment biases from their parents is inconsistent with the data. 12

So, people don’t learn to be good investors from their parents. It’s caused by one-third genetic and another third unmeasurable random tiny effects from the nonshared environment. Makes one think better of Gregory Clark’s claims about England, eh?

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