Nature, Nurture and the Fate of your 401(k)

Last Updated Dec 1, 2009 1:47 PM EST

The emotional component of investing has grabbed much of the attention the past few years. We've been told -- repeatedly -- by behavioral economists that the secret to successful investing is to fight our brain's proclivity for having us do the wrong thing at precisely the wrong time. Conquer the behavioral finance holy trinity of bias (Recency, Confirmation and Hindsight) and ward off Anchoring and Inertia, and your portfolio will prosper.

You might also want to check your genetic disposition.
According to a new study, a big chunk of why we do the crazy (or smart) investing things we do can be attributed to genetics. Researchers pored over the investing habits of nearly 40,000 Swedish twins and found that they tend to share investing traits. The study Nature or Nurture:
What Determines Investor Behavior?
concludes that 45 percent of the "heterogeneity" in investing behavior (stock participation, asset allocation, portfolio risk) is due to "a latent genetic factor." The researchers explain:

  • "The magnitude of such a genetic factor is very large compared to other individual characteristics such as age, gender, education, and wealth, which have been explored in the existing ï¬?nance literature. We ï¬?nd that the genetic component explains a signiï¬?cantly larger proportion of the variation across individuals than do an extensive set of individual characteristics combined. Overall, our evidence indicates that an individual's genetic composition is an important determinant of the individual's investment behavior."
Yep, thank (or blame) your parents for nearly half of your investing habits.

Raising the Education Stakes
With such a strong biological component to our investing make-up, it raises the question whether even the most well-intentioned and well-conceived education can create better 401(k) outcomes. As the authors state:

"To the extent that behavior among investors is genetic, we would expect that investment behavior can persist despite ample feedback and education. This has implications for the challenges of educating the public."
That strikes me as an argument for creating more 401(k) "automation": auto-enrollment, auto-escalation of contribution rates, target funds (auto allocation), and auto-rebalancing can go a long way toward counteracting any behavioral or genetic shortcomings.