Thursday, 26 April 2012

The Genetics of Investing

Are you one of the better investors?  The answer might lie in your genes.
Investors frequently fall prey to a myriad of asset-damaging biases, such as engaging in excess trading, being inadequately diversified or thinking that recent success proves you’re a genius unconstrained by the normal rules of sound financial management.
A recent academic paper titled “Why Do Individuals Exhibit Investment Biases?” by finance professors Henrik Cronqvist and Stephan Siegel argues that around 50% of the variation of biases among people comes from their genes.  What this means is that if you try to explain why some people make certain kinds of financial mistakes, about half of your explanation should point to genetics and the other half to environmental differences.
A key implication of the authors’ analysis is that you can’t trust your intuition with regard to investments because your genes probably push you to make irrational choices.  When deciding how to invest, consequently, you should be open to going against what feels right in favor of following sound investment advice such as buy and hold, diversify and don’t mistake luck for financial acumen.
The really interesting implications of this genetic analysis, however, won’t kick in until a lot more people get their genes sequenced.  The cost of digitally transcribing someone’s DNA is exponentially dropping.  It’s reasonable to predict that within 10 years, most everyone in rich countries will for health reasons have their DNA analyzed; after all, if your genes make you susceptible to a certain kind of cancer, you really want to know this so that you can get yourself tested.  But once you know your DNA and understand the genes that cause specific biases, you could learn exactly what kind of investment problems your genes predispose you to.
Parents could use information gleaned from their children’s DNA to figure out what kind of financial lessons to give their offspring, and to in part determine which of their children should have power of attorney over them if they become medically incapable of making financial decisions.

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