February 22, 2012 by The Guru Investor How much of our investment success or failure is a result of our genetic makeup? An intriguing new study attempts to answer just that question, The Wall Street Journal’s
Jason Zweig notes on WSJ’s Total Return blog.
The study, performed by finance professors Henrik Cronqvist of Claremont McKenna College and Stephan Siegel of the W.P. Carey School of Business at Arizona State University, draws on “two sets of remarkable data” from Sweden, Zweig says. One data set is available because the Swedish government until recently collected data about each holding of taxpayers’ investment accounts, Zweig says, and the other is available because the Swedish government enters all twin births in a national registry. Cross-referencing the two data sets, the professors were able to track how similar or different twins’ investing behaviors were. They looked to see whether sets of twins demonstrated five main behavioral investing mistakes: inadequate diversification, excessive trading, reluctance to sell at a loss, chasing hot recent performance, and trying to get rich quick.
“Cronqvist and Siegel found, across the twins in their sample, that genetic variation explained between one-quarter and nearly one-half of the extent to which investors suffered from these biases,” Zweig reports. “Inadequate diversification scored the highest, with genetic effects explaining 45.3% of the variation across investors. At the low end, 25.7% of the degree to which investors traded too much was explained by their genetic variation.”
Zweig notes that there obviously is more to a person’s investing decisions than DNA. “But there’s good reason why Wall Street’s marketers invoke urgency, familiarity, temptation and a lottery mentality when they’re selling products and services,” he adds. “Millions of investors are probably born with the genetic predisposition to underdiversify, trade too much, chase hot returns and bet on longshots. … This new research hammers home how vital it is for us all to realize, in the immortal words of Benjamin Graham, that ‘the investor’s chief problem — and even his worst enemy — is likely to be himself.’”
