Genetics ‘Single Greatest Determinant’ of Financial Behavior

Are your clients savers or spenders? It may be an orientation rather than a lifestyle

How much of human behavior is determined by what’s in our genes? Surprisingly, a great deal when it comes to spending and saving patterns, says Stephan Siegel, assistant professor at the University of Washington, Foster School of Business in Seattle.

Genetics, he says, is the single greatest determinant of an individual’s propensity to either save or spend. While there is ample research to underscore the impact of learned behavior—what individuals acquire from their parents and through their experiences in life—on people’s financial decisions, what’s instinctive is actually more important and powerful in determining how individuals save and spend.

“Society is moving more and more toward defined-contribution plans, both at the governmental and corporate level, and the responsibility to save is clearly on the individual,” Siegel says. “The question of what determines people’s saving behavior is therefore extremely important to policymakers, financial firms and finance professionals.”

Siegel, along with Henrik Cronqvist, a professor at Claremont McKenna College in Claremont, Calif., conducted an empirical study of the variations in savings behavior across individuals by examining the gene-environment interplay on 15,000 sets of Swedish twins. They studied identical twins (twins sharing 100% of the same genes); fraternal twins (where 50% of the genes are shared); twins who grew up in the same family and shared a common environment; and twins in non-shared environments.

The results of their study—presented in a 2010 paper entitled “The Origins of Saving Behavior”—showed that people are actually born to be either savers or spenders, and not much can be done to change that. One-third of saving or spending behavior is the result of a person’s genetic makeup, the research showed. Indeed, identical twins exhibited the same spending and saving patterns, even if they had grown up apart.

Of course, the strength of genetic predisposition doesn’t mean that the environment that surrounds people and the various forces that constitute that environment—parental influence, peers and life experience—don’t impact an individual’s savings behavior. Socialization does play a role, Siegel says, but its impact actually disappears over time so that, eventually, the innate is what prevails. 

“There is overwhelming evidence across the board that the genes matter and that between one-third and 50% of our behavior is determined by our genes,” Siegel says.  “As such, it seems that it would be counterintuitive to try to change a spending or saving behavior, since it’s determined to such a great extent by genetics.”

Siegel and Cronqvist’s research has brought to light the fact that a serious overhaul of an individual’s financial behavior may not only be something that’s very difficult to do, but also an effort that could ultimately prove pointless.

“A person might be better off if they can do what’s innate to them—like if they’re a big spender, then they’re probably better off spending and having less in retirement, than being forced to save and go against what’s natural to them,” he says. “So long as people don’t become dependent on the state—and this is what policymakers are trying to make sure doesn’t happen—a person might have better utility if they are allowed to do what they want to do, rather than being forced to do something that is against what is innate in them.”

For financial advisors, the take-home message of this and other studies in the important field of geno-economics is that forcing spenders to become savers might not necessarily be the right thing to do. Of course, financial advisors are charged with the task of helping people become more financially responsible so that they have a greater nest egg at retirement. However, taking into account the idea that inborn behavior is very hard to go against can perhaps help advisors formulate the correct savings and investment plan for their clients, Siegel says.

“Many people do want to change their habits, become greater savers than spenders, but helping them in small ways by coming up with changes that don’t put a lot of constraints on their innate behavior can probably produce better results and perhaps be more powerful,” he says. “Considering different investment options and the default settings in a retirement plan, for example, could be one way to go about this in a more subtle way.”

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