“Why do Individuals Exhibit Investment Biases?” Cronqvist & Siegel (2012)
Throughout these blogs I’ve attempted to put my own story across over why many investment biases might occur. The underlying theme is that naïve investors, without access to any better tools, misapply heuristics that generally serve well in consumer behaviour. A mismatch between consumer decision making and the investment world then leads to these well-known biases. Therefore, the impact of these biases might be reduced by changing surface features of the investing environment (e.g. the representation of costs, the order of decision making).
This paper uses a twin-based study to see if financial experience, education, or genetic factors can predict investment biases. Genetic factors are analysed by comparing the differences between identical and non-identical twins. The authors find that genetic differences can explain up to 45% of the variation in their dataset, and then make some arguments about the evolutionary adaptiveness of some of these traits (which I’m a little bit skeptical about). More interestingly, they find that although financial experience reduces the genetic influence, general education does not. General education does not translate across to financial education, perhaps because of the unique problems that investing presents.
The authors also look at the relationship between investors with insufficiently diversified portfolios and preference for home location. They find that investors with a lot of domestic stocks in their portfolios also live a below-average distance from their birthplace. This behavioural consistency across domains does suggest to me that investors are applying heuristics from other areas to investing.