October 10, 2010

A Third of Investor Behavior Determined by Genetics: Swedish Study

Twins growing up in different environments display similar behavior

If you’ve ever wondered why your clients behave the way they do with regard to investing, some of their tendencies may actually be in their genes.

According to a study from the Institute for Financial Research in Stockholm, there is a genetic component to the way people invest that makes up about a third of their behavior. The study, "Nature or Nurture: What Determines Investor Behavior?" by Amir Barnea, Henrik Cronqvist and Stephan Siegel, compared twins’ behavior with regard to money to determine if there was a genetic component to the way they invested and approached risk, and if so, how much of their approach was due to “nature vs. nurture.”

The authors studied the financial portfolios of more than 37,000 twins, as well as those of a like number of non-twins. Sweden’s detailed financial information available on individuals and its twins registry were beneficial in assembling the study pool. Allowing for any potential differences in behavior of identical vs. fraternal twins, as well as of those raised together vs. those raised separately, the study concluded that approximately a third of portfolio behavior was due to genetic makeup, and it remained largely unaffected by later experiences or by upbringing.

Also, the study found that while the way a child was raised had a considerable effect on the adult’s investment behavior, gradually those early experiences gave way to later experience as the person grew and developed.

The study was released on Sept. 15, with some earlier versions published on July 9, 2009, and Sept. 15, 2009.

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