First, the new finding: there's a genetic basis for differences in investor behaviour when it comes to the standard behavioural biases that folks find in the lab. They use the Swedish Twin Registry combined with a whack of data that Scandinavian countries seem happy to provide to researchers on individual tax filings. They've eight years of data matching twins (mono and dizygotic) with portfolio characteristics and trading. The difference in the correlation between mono and dizygotic twin pair behaviours identifies the genetic component of trading biases - the standard way of identifying heritability in all kinds of twin studies. Conclusion?
We find that a long list of investment biases, e.g., the reluctance to realize losses, performance chasing, and the home bias, are "human," in the sense that we are born with them. We base this conclusion on empirical evidence that genetic factors explain up to 50% of the variation in these biases across individuals. The psychological mechanisms behind the investment biases have apparently survived natural selection over hundreds of thousands of years, presumably because they maximize (or in a hunter-gatherer society used to maximize) the likelihood of human survival and reproduction (e.g., Rayo and Becker (2007) and Brennan and Lo (2009)). But in our current society, and when applied in the domain of investments, they may not always be appropriate.They also find that education does little to attenuate the effects of genetics on observed biases. Now, why might that be? Their method looks at the difference between monozygotic and dizygotic twins. But intelligence is also strongly heritable - the second (very old) finding. The linked meta-study puts heritability of intelligence at around 0.8 and up from age 18 onwards. Now, does IQ have any effect on stock market behaviour?
Let's turn to the newly published, but not new to loyal readers, finding that IQ drives both stock market participation and portfolio characteristics. Smarter people are more likely to be in the stock market and are more likely to hold diversified portfolios correcting for education and income.
So, put it all together. Heritable intelligence drives education choices, stock market participation, and behaviour once in the stock market. Some of the heritability estimates that Cronqvist and Siegel are finding (the first paper) are probably working through the IQ channel that Grinblatt, Keloharju and Linnainmaa (the last paper) found. Surprisingly, Cronqvist and Siegel cite earlier work by Grinblatt & Keloharju but miss the more recent piece.
There are papers combining Swedish Twin data with IQ measures; I'd be more confident in findings of heritability of stock market trading characteristics if they were able to sort twins into IQ brackets and show stronger monozygotic than dizygotic inter-twin correlations on trading among those bracketed sets of twins (or otherwise control for IQ). Suppose that IQ predicts education (but with noise) and that IQ predicts trading behaviour (also with noise). The mono vs dizygotic correlation difference that's identifying the genetic component of stock market behaviour could be picking up how IQ is affecting stock market behaviour rather than necessarily picking up an independent additional effect of genetics on behavioural biases. I'm not sure that controlling for education does a fantastic job in fixing that. I sure wouldn't throw away the Conqvist results on the basis of this, but as the IQ data is there, it's worth checking. Education isn't mediating the effects of genetics, on this account, because education is caused by heritable IQ. My econometrics aren't strong enough to say that for sure, or at least I haven't written out the model to check it.
Thanks to Robin Harrison and Seamus for a quick chat on econometrics; errors all mine as always.