Nature or Nurture: What Determines Investor Behavior?
University of Miami - Department of Finance
University of Washington - Michael G. Foster School of Business
February 3, 2010
Fourth Singapore International Conference on Finance 2010 Paper
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.
Number of Pages in PDF File: 56
Keywords: Portfolio Choice, Investor Heterogeneity, Behavioral Genetics
JEL Classification: D10, D31, G11
Date posted: September 2, 2009 ; Last revised: March 4, 2010