Scandinavian Working Papers in Economics

SIFR Research Report Series,
Institute for Financial Research

No 72: Nature or Nurture: What Determines Investor Behavior?

Amir Barnea (), Henrik Cronqvist () and Stephan Siegel ()
Additional contact information
Amir Barnea: Claremont McKenna College
Henrik Cronqvist: Claremont McKenna College
Stephan Siegel: University of Washington

Abstract: Using data on identical and fraternal twins' complete financial portfolios, we decompose the crosssectional 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-codes: D10; G11

53 pages, September 15, 2010

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