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Genes drive 45% of investing habits
The Swedish twin data
Sweden had a wealth tax until 2007, so the government tracked every citizen's stocks, mutual funds, and savings. A researcher combined that data with the country's enormous twin database. Identical twins share all of their DNA and fraternal twins share half, and twins mostly grow up in similar homes with similar schooling, so comparing the two groups shows how much of a behavior is inherited.
Six investing biases
He measured six biases: holding too few stocks, trading too much, chasing whatever did well last year, favoring investments in the home country, loving lottery-type stocks, and refusing to sell losers.
What education changed
Education made less difference than most people would expect. Once the researchers matched people for schooling, someone who had read a pile of business books was not necessarily a better investor. Apart from genetics, the only factor that made a meaningful difference was working in finance.
Why do twin studies separate genes from upbringing?
Twin studies rest on the equal environments assumption, which holds that identical and fraternal twins are treated about the same by their families. If identical twins resemble each other more than fraternal twins do, the extra similarity is credited to the DNA they share. Researchers then express this as a heritability estimate, a share of the differences between people in a group. It describes a population, so it cannot say how much of any one person's behavior comes from genes.
Why did Sweden's wealth tax create such rich data?
Under a wealth tax, residents report the value of their holdings to the tax authority every year. Sweden therefore held records of what each household owned, and those records could be linked to the national twin registry. Sweden abolished the tax in 2007. Few countries have had both a registry of holdings and a registry of twins, which is why the Swedish studies are cited so often.
Why do investors favor stocks from their own country?
This pattern is called home bias. Economists Kenneth French and James Poterba reported in 1991 that investors in the United States held about 94 percent of their stock holdings in American companies, even though foreign markets made up a large share of world stock value. Familiarity is the usual explanation, since people feel they understand the companies they hear about at home. The pattern has been found in many countries.
Why do people hold on to losing investments?
Economists Hersh Shefrin and Meir Statman named this the disposition effect in 1985. A paper by Terrance Odean in 1998, based on thousands of brokerage accounts, found that investors sold their winning stocks more readily than their losing ones. Selling a loser turns a paper loss into a real one, and people dislike that more than they like an equal gain. Losses weigh heavier than gains in prospect theory, the framework Daniel Kahneman and Amos Tversky published in 1979.
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