Nature or Nurture: What Determines Investor Behavior?

56 Pages Posted: 2 Sep 2009 Last revised: 4 Mar 2010

Amir Barnea

HEC Montreal

Henrik Cronqvist

University of Miami - Department of Finance

Stephan Siegel

University of Washington - Michael G. Foster School of Business

Date Written: February 3, 2010

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 experiences. 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.

Keywords: Portfolio Choice, Investor Heterogeneity, Behavioral Genetics

JEL Classification: D10, D31, G11

Suggested Citation

Barnea, Amir and Cronqvist, Henrik and Siegel, Stephan, Nature or Nurture: What Determines Investor Behavior? (February 3, 2010). Fourth Singapore International Conference on Finance 2010 Paper. Available at SSRN: https://ssrn.com/abstract=1467088 or http://dx.doi.org/10.2139/ssrn.1467088

Amir Barnea

HEC Montreal ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-7321 (Phone)
514-340-5632 (Fax)

Henrik Cronqvist

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States
(305) 515-5898 (Phone)

HOME PAGE: http://sites.google.com/site/henrikcronqvist/

Stephan Siegel (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

HOME PAGE: http://faculty.washington.edu/ss1110/

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