Week 7 - Barnea, A., Cronqvist, H., and Siegel, S. (2010). Nature or nurture: What determines investor behavior?

Question 1

What is the main idea of this paper?

Answer 1

• What are the differences in investment behaviour across individuals?
• Nature vs. Nurture
• Collect data on Swedish twins (identical 100% vs. fraternal 50%). There were no differences in the nurture of these twins.
• Measure of investment behaviour: (1) stock market participation; (2) allocation to equities; (3) equity portfolio volatility

Question 2

What are the findings of this paper?

Answer 2

• Since the correlation is less than one, there is evidence for nurture
• However, nature also plays a role
• ACE model: accounts for unobservable random effects through residual variance decomposition
  o Common environment does not explain differences
  o Non-shared environment contributes substantially to heterogeneity
  o The genetic component drops from 32% to 29% when controlling for a lot of environmental factors
  (wealth, marital status, education, etc)
• Correlation decreases with age
• Heritability of investment behaviour is similar across men and women
• The steepest incremental effect of the genetic component is the biggest during the early years
• Shared environment is only significant until the age of 30; completely disappears afterwards
• Therefore, the non-shared environment increases with age

Question 3

What is the summary of this paper?

Answer 3

Individuals are biologically predisposed to certain behaviors in the financial domain such as stock market participation.
Policy measures such as financial literacy education are only effective to the extent that they have a non-genetic influence on the participation decision.
Even if variation in participation in the stock market is entirely due to genetic variation, policy initiatives that reduce entry barriers can increase the average participation in the economy.