Does nature trump nurture when it comes to investing?
Biology is not destiny, but research indicates our genes play a large part in our investment approach.
New York Stock Exchange traders: We are, according to one finance professor, biologically predisposed to screw up in our investment choices. Photograph: Brendan McDermid/Reuters
Investing is simple but not easy, as Warren Buffett once quipped, which is why so few people seem to follow that simple dictum about buying low and selling high. Can we do anything about it? Can ordinary people learn to be good investors? Or are we condemned by our genes?
Genetics has a lot to do with investment performance, according to Swedish finance professor Henrik Cronqvist, accounting for up to 45 per cent of investor behaviour. Other factors, such as age, education, gender and wealth, are deemed nowhere nearly as important, while the impact of parental guidance weakens significantly as people age.
Cronqvist, who has co-authored a number of studies into the area, used the Swedish Twin Registry – the world’s largest – to analyse the investing behaviour of almost 38,000 twins in Sweden. Investing similarities were much more obvious among identical twins, he found, than non-identical twins – the latter share about 50 per cent of their DNA, compared to 100 per cent in the case of identical twins. In fact, the correlation in investing behaviour among twins that were raised separately – there were 716 cases – was almost identical to that of twins that were raised together.
The research, he concludes, indicates many well-known investing errors, such as poor diversification, overtrading, loss aversion, chasing after yesterday’s winners, and “lottery-type” investing behaviour, are “manifestations of innate and evolutionary ancient features of human behaviour”. We are, in essence, biologically predisposed to screw up.
Environmental influencesOf course, genetics isn’t everything. “Even genetically identical investors who grew up in the same family environment differ substantially in terms of their investment behaviours,” Cronqvist notes. A person’s environment and individual life experiences, he adds, must therefore play an important part in shaping investor behaviour.
A recent Cronqvist paper, Value versus Growth Investing: Why Do Different Investors Have Different Styles?, found investors with adverse economic circumstances – for example, those who grew up during the 1930s Depression, or who entered the job market during an economic downturn, or who came from a poorer background – were more likely to be drawn to a value investing approach several decades later in their lives. (This finding has obvious implications for Irish investors who, scarred by the property crash and banking meltdown, are likely to take a much more conservative approach in the decades to come.)