What accounts for the persistence in diversity of investor beliefs and behaviors? Why does logical inference from common data not drive common attitudes and actions? In their March 2011 paper entitled “Serotonin and Risk Taking: How Do Genes Change Financial Choices?”, Camelia Kuhnen, Gregory Samanez-Larkin and Brian Knutson investigate differences in investing beliefs and behaviors associated with variations of a single gene (the serotonin transporter). Using demographic and financial information, tests of cognitive ability and numeracy, and measurements of attitudes toward financial decisions for 60 individuals recruited to be representative of San Francisco Bay Area adults, they find that:
- Individuals with the short version of the gene tend to avoid risk and complexity in financial choices, as indicated on average by lower allocation to stocks, more passive investment approach and smaller number of credit lines. Specifically, compared to long-version genotypes, short-version genotypes on average :
- Allocate 24% less to stocks and 26% more to cash.
- Have 13 fewer credit lines.
- Have 93-point higher FICO scores.
- The genotypes do not differ with respect to cognitive skills, education, wealth or specific ability to learn from financial information.
- Both psychological testing and brain imaging suggest that the short-version genotype tends to focus on negative rather than positive potential outcomes of financial choices and be more pessimistic when assessing their own standing in society.
The authors note the small sample size (constrained by testing costs) and potential biases associated with self-selection for participation, self-reporting and responses to hypothetical investment questions. Note also that the San Francisco Bay area population may not be representative of other regions.
In summary, evidence suggests that genetic makeup helps explain individual differences in investing beliefs and behaviors, in this case indicating that emotional reaction to risk (level of risk aversion) can outweigh cognitive ability and learning.
Investors are undoubtedly exposed to the serotonin-transport-genotype biases of themselves and their advisors in processing and acting on financial information. Might investors tend to select advisors with like genotypes, thereby amplifying level of risk aversion? Are market commentaries more about the market or the commentators?
Since “approximately 80 percent of the human body’s total serotonin is located…in the gut”, this research perhaps epitomizes Trading from Your Gut. See also “Genetics of Investing (Not Algorithms)” for summaries of other research on how genetics influence investor behavior.
