On The Origins Of Risk-Taking: Nature Or Nurture?

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On The Origins Of Risk-Taking


H/T Abnormal Returns

Sandra E. Black

University of Texas at Austin – Center for Law, Business, and Economics; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA); Norwegian School of Economics (NHH) – Department of Economics

Paul J. Devereux

University College Dublin – Department of Economics; Institute for the Study of Labor (IZA)

Petter Lundborg

Lund University School of Economics and Management; Tinbergen Institute; Institute for the Study of Labor (IZA)

Kaveh Majlesi

Lund University

July 2015

NBER Working Paper No. w21332


Risk-taking behavior is highly correlated between parents and their children; however, little is known about the extent to which these relationships are genetic or determined by environmental factors. We use data on stock market participation of Swedish adoptees and relate this to the investment behavior of both their biological and adoptive parents. We find that stock market participation of parents increases that of children by about 34% and that both pre-birth and post-birth factors are important. However, once we condition on having positive financial wealth, we find that nurture has a much stronger influence on risk-taking by children, and the evidence of a relationship between stock-holding of biological parents and their adoptive children becomes very weak. We find similar results when we study the share of financial wealth that is invested in stocks. This suggests that a substantial proportion of risk-attitudes and behavior is environmentally determined.

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On The Origins Of Risk-Taking – Introduction

Parents who hold riskier financial portfolios have children who themselves hold riskier financial portfolios. In the United States, children with a parent who owned stocks in 1984 were 16 percentage points more likely to own stocks themselves in 1999 (Charles and Hurst, 2003). In Sweden, children with at least one parent who owned stocks in 2000 were 22 percentage points more likely to own stocks themselves in that same year. The intergenerational persistence of risky market participation and its determinants are important, first and foremost, because of their welfare implications; historically, risky market investment has had a higher return compared to safer financial assets such as bonds and money market funds. Thus, to the extent that risk-taking behavior is correlated with wealth, these behaviors can exacerbate or mitigate wealth inequality over time. Also important, understanding the determinants of risky market investment provides evidence on the determinants of risky behavior more generally.

But why is risk-taking correlated across generations? Does this have to do with genetic or innate characteristics that are correlated across generations (such as innate risk preferences), or is it that children learn from parents, and risk-taking behavior is acquired over one’s lifetime?2 Is it nature or is it nurture? To provide insight into this question, we take advantage of a unique feature of the Swedish adoption system whereby we observe both the biological and adoptive parents of adopted children. We use administrative data on the portfolio choices of a large sample of adopted children born between 1950 and 1980 merged with similar information for their biological and adoptive parents–as well as corresponding data on own-birth children. We disentangle the role of nature versus nurture in the intergenerational transmission of risky behavior by looking at how the risk taking behavior of adoptive children is related to that of both their biological and adoptive parents. Adoption allows us to examine the effects of environmental factors in a situation where children have no genetic relationship with their (adoptive) parents.

Our paper relates to an active literature that documents intergenerational correlations in both risk preferences and asset allocations. Charles and Hurst (2003), Hryshko, Luengo-Prado, and Sorensen (2011), Dohmen, et al. (2012), and Kimball, Sahm, and Shapiro (2009) all document similarities in self-reported attitudes towards risk across generations. The same tendency in the choice of assets across generations has been documented by Chiteji and Stafford (1999) and Charles and Hurst (2003), among others.

To distinguish between genetic and environmental determinants of risky financial behavior, the literature has focused on twins studies.4 Cesarini et al. (2010) and Barnea, Cronqvist, and Siegel (2010) both use differences between identical and fraternal twins to decompose the cross-sectional variation in investor behavior. Interestingly, they find very little, if any, role for shared environmental factors, suggesting that parental influences on children only operate through genetic channels. 5 However, the twin approach is fundamentally different from what we do with adoption data in that it decomposes the total variation in asset allocation into genetic and environmental factors; it does so by making relatively strong assumptions about the similarities in environment and genetics across fraternal and identical twins. Our approach studies the intergenerational association and relies on an entirely different set of assumptions. Because of the differences in the methodologies and goals, the approaches can be seen as complements rather than substitutes.


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