Genetic predisposition rather than lack of knowledge or financial education is the biggest hurdle confronting super fund trustees, wealth managers and financial advisers trying to help fund members and investors make better investment decisions, reveals new research.
The shock results are contained in a study by Henrik Cronqvist, associate professor of financial economics at the Claremont McKenna College, and Stephen Siegel, visiting assistant professor of finance at Arizona State University, just published in the Social Science Research Network and reported by The Economist news magazine.
"We find that a long list of investment biases, eg, the reluctance to realise losses, performance chasing, and the home bias, are human in the sense that we are born with them. Genetic factors explain up to 50% of the variation in these biases across individuals," they wrote in their recent paper 'Why Do Individuals Exhibit Investment Biases?'
The research is based on a study of more than 15,000 Swedish twins from the world's largest twin registry, the Sweden Twin Registry, that matched detailed data on the twins' investment behaviors against their genetic profile.
The methodology behind the study is that "identical twins share 100% of their genes, while the average proportion of shared genes is only 50% for fraternal twins. If identical twins exhibit more similarity with respect to these investment behaviors than do fraternal twins, then there is evidence that these behaviors are influenced, at least in part, by genetic factors," explained the authors.
While Cronqvist and Siegel acknowledge the limitations of their study they nonetheless argue that it has profound implications in that there is no evidence education attainment is a significant moderator of investment behavior.
Their overall conclusion has potential to rock the wealth management world that believes people's innate investment behavioral biases can be overcome through marketing and engagement strategies.
"Our evidence has implications for the design of policy initiatives. It suggests that policy should recognise that many individuals indeed exhibit investment biases, and that altering such biases can be difficult," Cronqvist and Siegal concluded.