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Nature, Nurture, and Financial Decision-Making Why Do Individuals Exhibit Investment Biases?. University of Michigan-Dearborn Betty F. Elliott Initiative for Academic Excellence: Financial Literacy April 9, 2012. Henrik Cronqvist Claremont McKenna College Stephan Siegel
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Betty F. Elliott Initiative for Academic Excellence: Financial Literacy
April 9, 2012
Claremont McKenna College
University of Washington
Arizona State University
“Economics is a branch of biology broadly interpreted.”
“The discovery of a patience gene could shed light on the extent to which correlations between the wealth of parents and their children reflect predispositions rather than environmental factors that are presumably more amenable to policy intervention”
* Benjamin, Chabris, Glaeser, Gudnason, Harris, Laibson, Launer, and Purcell (2007)
The investor’s chief problem and even his worst enemy is likely to be himself.
Preferences and belief formation as outcome of natural selection
Jack Hirshleifer (1977), Becker (1976)
Robson (1996, 2001), Netzer (2009), Robson and Samuelson (2009)
Nature selects behaviors that maximize fitness
Depending on environment, biases can emerge
Loss Aversion: McDermott, Fowler, Smirnov (2008) [in biology: e.g. Caraco (1980)]
Over-confidence: Johnson and Fowler (2011)
Probability Matching: Brennan and Lo (2009)
Information and education
IncentivesWhy Do Individuals Exhibit Investment Biases?
Models of natural selection require some genetic variation
Understand whether education, experience, or incentives affect the importance of different sources
In particular, what conditions moderate genetic predispositions
Improve policy design
Invest in gene and genome wide association studiesObjectives
Gene Association Studies
Mary Kate and Ashley
Elin and Josefin
If genes matter, then identical twins should be more similar than fraternal twins in terms of their behavior.
Estimate parameters σ2a, σ2c, and σ2e via maximum likelihood estimation (MLE) with bootstrapped standard errors
Derive the variance components:
A-share – genetic component:
C-share – common environment
E-share – individual environment & measurement error:
D E T A I L
Proportion of equity portfolio held in Swedish equity
Conceptually: PGR – PLR (Odean (1998), Dhar and Zhu (2006), Campbell et al. (2009)) Based raw return in years with at least one sales transaction
Annual sales volume (SEK) divided by value of portfolio at beginning of year.
Fractions of stocks acquired with raw returns in top two deciles
Fraction of lottery stocks in portfolio (Kumar (2009))
Years of Education