Jonathan Hartley GSAM / Harvard Kennedy School March 22, 2019

1. Jonathan Hartley GSAM / Harvard Kennedy School March 22, 2019 Presented at the 2019 Rodney White Conference Discussion of: “Molecular Genetics, Risk Aversion, Return Perceptions, and Stock Market Participation” Richard Sias, Laura Starks, and H. J. Turtle

2. Paper Outline • SST’s exercise is to identify how 8 Polygenic Scores (PGS) (genetic markers associated with various traits) • from the Health and Retirement Study are associated with/potentially explain variation in: • Risk Aversion (- educational attainment, - height, + neuroticism/depressive symptoms, + poor health) • Return Expectations (+ educational attainment, + general cognition, - neuroticism, - poor health) • Equity Market Participation (+ educational attainment, + general cognition, - neuroticism, - poor health, - BMI) • (consistent with further biological evidence from twins studies that risk aversion traits are inheritable) • Genetic endowments associated with risk aversion and formation of return expectations • explain 30% of variation in stock market participation • The less risk averse/higher the return expectations, the greater likelihood of equity mkt/risky asset participation • (consistent with economic theory)

3. Discussion Outline • In this Discussion, I want to do two things: • Talk about why this is an important result • Talk about the role of genetics (nature) versus experiences (nurture) in influencing • stock market participation, risk aversion, and return expectations: • The PGS of Sias, Starks and Turtle (2018) versus the “Depression Babies” of • Malmendier and Nagel (2011)

4. SST Extends The Existing Literature on Genetic Endowments and Economic Outcomes • SST is an extension of previous studies which look at the connection between PGS • Health and Retirement Study data and other economics outcomes like: • 1) Papageorge, and Thom (2018) • which looks at links between 1. PGS and educational outcomes as well as 2. PGS and labor market outcomes • 2) Barthe, Papageorge, and Thom (2018) • which studies an Educational Attainment PGS (genetic markers that predict educational attainment and • its links to wealth inequality (which includes examining association with stock market participation). • SST goes beyond this to study genetic endowments/PGS related to cognition, personality, • health, and body shape and their relation to stock market participation, risk aversion, return expectations

5. Why Are These Results Important • Explain Variation in Important Parameters and Biases • Able to separate genetic factors and non-genetic factors in understanding variation in variables like risk aversion: Eg. “genetic component” of trust accounts for 41% of equity market participation, 25% of risk aversion, and 33% of equity market price expectations. Goes much further than Barthe, Papageorge, and Thom (2018) • Able to potentially understand how much genetics/which PGS account for biases: • The historical likelihood of a 20% of greater decline in U.S. equities over 12 months is 6.6% • Whereas sampled individuals estimate the probability at 30% • Help Better Shape Policies That Promote Equity Market Participation • According to the 2016 Survey of Consumer Finances, 13.9% directly own stock, 51.9% directly+indirectly • Understand what kind of people are more pre-disposed to being less risk averse and having less equity market participation, policymakers can more appropriately design policies/nudges that target such genetically pre-disposed individuals from an early age; 401(k) opt-out and Cory Booker’s Baby Bonds

6. Biases in Survey Data / Causal Mechanisms? • Talk about these SST estimates and those from the literature, how to interpret them with some caution: • Selection bias in Health and Retirement Study Survey Data? • Maybe those that are likely to respond favorably to providing their genetic code have certain genetics • Maybe those with genes that associated with paranoia (eg. neuroticism) are both less likely to respond to the survey with genetic data (because they don’t want to give their genetic data away over some irrational fear of what might happen if the government had their genetic data) and are less likely to invest in stocks • If that we’re the case, the survey dataset by not capturing these paranoid people; • might be underestimating certain linkages between genetics and equity market participation • Causal Links? • Expression of Certain (SST) Risk Taking Related Genes —> Less/More Stock Market Participation • (SST does a great job talking a lot about genetic associations/correlations rather than causality; • Eg. no specific “equity market participation” gene)

7. Experiences, Genetics and Epigenetics • Genetics, Experiences And Their Interactions (Epigenetics) • Let’s think more about mechanisms/causality; are the big factor PGS of Sias, Starks and Turtle (2018) • or experiences Malmendier and Nagel (2011) driving stock market participation or possibly an interaction • of the two (epigenetics)?: • Epigenetics are the idea that certain gene expression can be triggered by certain experiences • Maybe those who live through recessions/depressions are more likely to experience a period of very • bad malnutrition / very poor sleep that influences our genes through epigenetics? • Bad (Depression Babies) Experiences —> Activate Expression of Certain (SST) Genes —> Less Stock Market Participation • Caspi, A. (18 July 2003). "Influence of Life Stress on Depression: Moderation by a Polymorphism in the 5-HTT Gene". Science. 301 (5631): 386–89.

8. Experiences, Genetics and Epigenetics • Maybe the Depression Babies “experience” story of Malmendier and Nagel (2011) is actually an epigenetic one: • There is some interaction with the PGS/genes of SST • Epigenetics Studies • Caspi et al (2003) on early life stress causing adult depression through epigentics • One-thousand subjects assessed multiple times from preschool to adulthood • Subjects who carried one or two copies of the short allele of the serotonin transporter promoter • Polymorphism exhibited higher rates of adult depression and suicidality when exposed to childhood • maltreatment when compared to long allele homozygotes with equal early life stress exposure • Parental nutrition, in utero exposure to stress, male-induced maternal effects such as attraction of • differential mate quality, and maternal as well as paternal age, and offspring gender could all possibly • influence whether a germline epimutation is ultimately expressed in offspring and the degree to which • intergenerational inheritance remains stable throughout posterity • Caspi, A. (18 July 2003). "Influence of Life Stress on Depression: Moderation by a Polymorphism in the 5-HTT Gene". Science. 301 (5631): 386–89.

9. Fear Conditioning (Epigenetics cont’d) • Epigenetic studies (Szyf (2014)) on mice have shown that certain conditional fears can be inherited • from either parent. In the experiment, mice were conditioned to fear a strong scent, acetophenone, • by accompanying the smell with an electric shock. • The treated mice learned to fear the scent of acetophenone alone • It was discovered that this fear could be passed down to the mice offspring (two generations) • despite them never receiving an electric shock • Mice inherit the fear epigenetically by site-specific DNA methylation • Analog to finance: Maybe your parents are first generation depression baby and that fear of stock market • investing gets passed down through epigenetics (nature explanation vs nurture explanation of hearing horror • stories of the Great Depression which is why you’re less likely to invest in the stock market in the 2nd gen) • Szyf M (2014). "Lamarck revisited: epigenetic inheritance of ancestral odor fear conditioning". • Nat. Neurosci. 17 (1): 2–4. doi:10.1038/nn.3603. PMID 24369368.

10. Areas of Future Study • Use the Great Recession as an identification method: • Look at Health and Retirement Study waves before and after the Great Recession; • any association between certain PGS and the change in market participation before and after experiencing the Great Recession? (Hard given that questions re: stock return expectations don’t start • until 2010) • Do a twin study (dizygotic and monozygotic) before and after recessions (same DNA, different experiences): • Maybe one twin in the Great Recession, lost their job or a lot of money in the market and another didn’t • Maybe one twin moved to a country that had a really challenging series of deep recessions (Italy) and • another went to a country without recessions (Switzerland)