Why Do Wealthy Parents Have Wealthy Kids?

The researchers explore previous studies that looked at whether the correlation of higher wealth among succeeding generations came from the “genetic inheritance of skills, attitudes and preferences.”

Why should you care whether it’s nature or nurture? One reason would be to understand your current clients and whether their children are more likely to be wealthy in their own right. Another, the researchers point out, has to do with governmental policies that seek to raise revenue while not placing an undue burden on the wealthy or limiting children’s future success. They write, for example, that “a tax on parental wealth is likely to have less implication for intergenerational mobility if the intergenerational wealth correlation is predominantly due to nature rather than nurture.” There has been research showing a genetic component to levels of risk-taking behavior, and the Swedish adoption data has been used in at least one research paper looking at risk taking in the financial markets. Those studies, the researchers say, found that characteristics  of both biological and adoptive parents were predictive of child outcomes.

First, here’s a brief report on how the study was conducted. The researchers used data on the net wealth of adopted children in Sweden born between 1950 and 1970 and compared it with data for their biological and adoptive parents and those adoptive parents’ biological children, all using Sweden’s wealth registry for the data. The adoption dates are important because in those years, private adoptions were illegal in Sweden, so the government handled all adoptions and thus has the data; the adoptions were also conducted randomly.

The researchers admit that “wealth” in Sweden differs in some ways from the U.S., such as in its retirement system and its family law. But they make other points that they say allow the data to be applied to other countries, including the U.S. For example, stock market participation rates are higher in Sweden than in many other countries, including the U.S., and in Swedish divorce law there is no incentive for one parent to hold on to more assets.

Reasons for Nurture Over Nature

So if the data clearly shows that nurture begets wealth rather than nature, why is that the case?

The researchers admit that wealthier parents tend to be better educated and have higher incomes, so maybe their children’s wealth comes from those better educated parents “teaching them about investment opportunities or providing the right opportunities.” No, the data doesn’t support that argument.

So maybe wealthier parents invest more in their children’s education and career? That doesn’t work either, according to the data.

What the researchers posit is that answer may be that children of wealthier parents “may choose to save more or invest in assets that have higher returns,” or be more likely to make “financial gifts from parents to children.” They conclude that “Unfortunately, we do not have information on savings behavior or on financial gifts so this evidence is only suggestive,” though they did find that “innate childhood abilities do not drive the intergenerational correlations in wealth.”