Nature or nurture: What determines investor behavior?

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jfineco.2010.08.001 Byline: Amir Barnea (a), Henrik Cronqvist (a), Stephan Siegel (b) Abstract: Using data on identical and fraternal twins' complete financial portfolios, we decompose the cross-sectional variation in investor behavior. We find that a genetic factor explains about one-third of the variance in stock market participation and asset allocation. Family environment has an effect on the behavior of young individuals, but this effect is not long-lasting and disappears as an individual gains experience. Frequent contact among twins results in similar investment behavior beyond a genetic factor. Twins who grew up in different environments still display similar investment behavior. Our interpretation of a genetic component of the decision to invest in the stock market is that there are innate differences in factors affecting effective stock market participation costs. We attribute the genetic component of asset allocation -- the relative amount invested in equities and the portfolio volatility -- to genetic variation in risk preferences. Author Affiliation: (a) Claremont McKenna College, Robert Day School of Economics and Finance, CA, USA (b) University of Washington, Michael G. Foster School of Business, Washington, USA Article History: Received 18 September 2009; Revised 4 February 2010; Accepted 23 March 2010 Article Note: (footnote) [star] We thank two anonymous referees and seminar participants at the 2010 China International Conference in Finance, 2010 European Finance Association Meetings, 2010 European Winter Finance Conference, 2010 Utah Winter Finance Conference, 2010 Western Finance Association Meetings, 4th Singapore International Conference on Finance, Hebrew University, Wharton Impact Conference on Household Portfolio-Choice and Financial Decision-Making, Behavioral Finance Conference at Queen's University Rothschild Caesarea Center 7th Annual Academic Conference, Tel-Aviv University, University of Arizona, University of British Columbia, University of California at Riverside, University of Minnesota, University of Washington, and John Boyd, Daniel Dorn, Adlai Fisher, Murray Frank, David Goldreich, Todd Gormley, Greg Hess, David Hirshleifer, James Huang, Avi Kamara, George Korniotis, Jon Karpoff, Camelia Kuhnen, Harald Kullmann, David Mayers, Jan Mahrt-Smith, Ed Rice, Bill Schwert (the editor), Andy Siegel, Richard Smith, Gunter Strobl, Paolo Sodini, Martin Weber, Ingrid Werner, Scott Yonker, and Paul Zak for valuable comments. We are thankful to Jack Goldberg at the University of Washington Twin Registry for advice. We thank Statistics Sweden, the Swedish Twin Registry, the Swedish Investment Fund Association, Euroclear Sweden, and S&P for assistance with the data. Hannah Gregg and Lew Thorson provided outstanding research assistance. We acknowledge generous research funding from the Financial Economics Institute and the Lowe Institute of Political Economy at Claremont McKenna College (Barnea and Cronqvist), and the Global Business Center and the CFO Forum at the University of Washington (Siegel). The Swedish Twin Registry is supported by grants from the Swedish Research Council, the Ministry of Higher Education, AstraZeneca, and the National Institute of Health (Grants AG08724, DK066134, and CA085739). This project was pursued in part when Cronqvist was visiting the Swedish Institute for Financial Research (SIFR), which he thanks for its hospitality. The project has been reviewed by the Swedish Twin Registry (submitted 12/31/2007, approved 3/14/2008), the Ethics Review Board for the Stockholm region (submitted 10/24/2008, approved 11/26/2008), and Statistics Sweden (submitted 11/20/2008, approved 3/3/2009). Any errors or omissions are our own.