My Genes Made Me Do It!
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  1. The "Nature or Nurture" Study
  2. Investment Decisions are Genetically Based
  3. Implications and Observations
  4. What About Investment Professionals?
  5. Overcoming Bad Genetic Behavior


A major study was released in September that seeks to identify the connection between genetics and investor behavior. The study, entitled "Nature or Nurture: What Determines Investor Behavior" was published by Amir Barnea and Henrik Cronqvist of the Claremont McKenna College - Robert Day School of Economics and Finance and Stephan Siegel of the University of Washington - Michael G. Foster School of Business. Incredibly, the study found that investors are genetically hard-wired to make certain investment decisions.

This study is not only important on its own, but I find it to be very interesting as it relates to another long-term study of investor behavior. If you have been reading my E-Letters very long, you will know that I frequently mention the Quantitative Analysis of Investor Behavior (QAIB) study conducted by Dalbar, Inc. showing investors consistently earn less return than the major stock indexes because of frequent switching among mutual funds.

The decision to switch among different investments is often an emotional one, usually tied to a desire to avoid losses (fear) or a drive to "beat the market" (greed). Either way, these emotional decisions can lead to lackluster investment performance, as the Dalbar studies have documented since 1995. The Nature or Nurture study may now be the key to knowing why investors behave in such a way as to sabotage their own investment returns.

More importantly, however, is that the genetic link may help explain why investors consistently rejected Dalbar's advice to remain invested in buy-and-hold strategies even in the face of losses. Like the Nike commercials, Dalbar counseled to "just do it" without regard to innate biases of investors, but investors followed their emotions anyway.

This week, I'm going to present the findings of this important new study on the genetics of investor behavior and see how it dovetails into Dalbar's analyses over the years. If you've ever made an emotional investment decision and kicked yourself later for doing so, you'll find this week's topic to be very informative.

The Nature or Nurture Study Background

The Nature or Nurture study sought to determine what part genetics play in the way investors elect to invest. To do so, researchers had to first identify groups of investors with nearly identical DNA and then study the way they approached investment decisions. Note that I say "nearly identical" because a 2008 study showed that there can be some slight variations in genetics even between identical twins.

Fortunately, the authors of the Nature or Nurture study had access to the Swedish Twin Registry, the world's largest database of twins maintained by the Karolinska Institutet in Stockholm, Sweden. While there are twin registries in the US, the Swedish database contains much more detailed information that researchers needed to perform a more complete analysis.

Researchers eventually identified 37,504 twins, including both identical and non-identical twins. While it's not really relevant to this discussion, I found it interesting to note that non-identical (fraternal) twins account for 71% of all twins in the Swedish Registry, with identical twins making up the remaining 29%. In addition, male identical twins were the least common twins (12% of the total) while opposite sex fraternal twins were the most common (38% of all twins).

The table below provides a more complete picture of the twins participating in the study:

Twin study

Of the above groupings, the identical twins were the most important as they are as close as possible to being identical genetically. While fraternal twins share parentage and birthdates, they have only 40% to 60% of their DNA in common, the same as any other brother/sister from the same parents. Thus, fraternal twins served as an excellent source of comparison as individuals who are genetically related and usually shared a common upbringing.

Once all of the twins had been identified, it was then necessary to identify the investment characteristics of each. Sweden again provided the means for this research via a 1.5% wealth tax levied by the Swedish Tax Agency. Prior to the wealth tax being abolished in 2007, Swedish financial institutions had to report financial holdings of individuals to the Tax Agency. This data served as the basis for identifying the portfolio choices for individuals covered by the study.

The study compared personal financial data of identical twins, fraternal twins, a control group of unrelated individuals and even identical twins who were raised apart from each other. A variety of comparisons were made using factors such as age, gender, education, wealth and home ownership in an effort to determine whether nature or nurture was most important when making investment decisions. The results of the study were quite surprising.

Findings of the Nature or Nurture Study

When comparing stock market participation, asset allocation and portfolio risk, researchers found that there was a significantly higher correlation between identical twins than any other group, including fraternal twins. In other words, individuals sharing almost identical genetics were more likely to share common portfolio holdings than individuals with other common characteristics such as age, gender, education or even parentage.

According to the study, genetics account for up to 45% of an individual's investing behavior. Other factors such as age, gender, education, wealth and home ownership, explain only 5% to 10% of behavior. Amazingly, the study found that even identical twins who were reared apart share a substantial component of their investment behavior, leading the authors to conclude, "…individuals are biologically predisposed to certain behaviors in the financial domain." The graph below provides a more complete picture of the study's results:

Correlations by Genetic Similarity

The Nature or Nurture study also found that the importance of genetics tended to decline as age increased, no doubt because of the accumulation of life experience, but never totally disappears even in the oldest study participants. Summing up the study's findings, the authors make the following observation:

"The most important, and perhaps also most surprising, conclusion from our study is that individuals are biologically pre-disposed to certain investment behaviors in the financial domain to such a large extent. This result is not only relevant for our general understanding of the foundations of investor behavior, but it is also of relevance for the effectiveness of public policy intervention related to financial markets. For example, to the extent that behavior among investors is genetic, we would expect that investment behavior can persist despite ample feedback and education. This has implications for the challenges of educating the public on matters relevant for investment decisions."

While the Nature or Nurture study found a link between genetic makeup and investment decisions, it didn't tell us how to determine what your genetic investor profile may be. Perhaps we'll see additional studies to identify the specific genes that control emotional investment decisions, but I doubt we'll hear about that any time soon.

The study does, however, shed some light on very common experiences we routinely encounter in the investment industry. For example, virtually all Investment Advisors (including my firm) use some sort of questionnaire to help determine investor goals, expectations and risk tolerance. These questionnaires are completed in the beginning of the Advisor/client relationship and are based on possible events such as losses, gains, market conditions, etc.

However, if you ask Investment Advisors, almost all will tell you that the actual behavior of their clients can be very different than the answers given on a questionnaire. Thus, the Nature or Nurture study reveals that learned behavior may control in a theoretical context, but when losses become real or a hot performer is discovered, genetics often take over.

As an example, a while back I wrote about an Advisor associate of ours who told of one of his clients who had indicated on a questionnaire that he was an aggressive investor and could withstand investment losses of up to 40%. However, when actual market losses reached a relatively mild 7% to 8%, the client was on the phone wanting to head for the exits. The surprise in this story is that the client was, himself, a securities broker. Though he had a desire to invest aggressively based on his training, his genes were definitely more conservative.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Implications and Observations

The first and most obvious implication from this new study is summed up in the above quote from the conclusion section of the report. Specifically, it says that an investor's genetic makeup can cause behavior that can "persist despite ample feedback and education." This might help to explain why Dalbar's repeated admonitions to buy and hold were not heeded by the average mutual fund investor. Perhaps these passive asset allocation strategies are simply contrary to many investors' genetic natures.

For individual investors, another implication is that you can't continue to make investment decisions based on answers from a questionnaire. As investment experiences are gained over time, it is important to incorporate reactions to these events into a client's profile. While my firm uses questionnaires, we also maintain a client contact database where we document virtually all of our conversations with clients. This way, we can see how clients' reactions to various market events over time might give a more accurate picture of their true investment preferences.

The study doesn't allow us to draw any conclusions about the value of genetic decisions since it didn't attempt to identify good versus bad genetic behavior. While I believe the Dalbar study accurately documents detrimental investor behavior that may be the result of genetics, not all such behavior is bad. Over the years, I have spoken to many people whose own instincts about investing made them very successful. I have even told some of them that they should consider becoming professional money managers.

Investment behaviors such as the willingness to take risk are not necessarily good or bad in and of themselves. Taking risk is usually associated with the potential for higher returns, but taking less risk can help preserve principal. The Dalbar QAIB studies appear to document that problems seem to arise when investments are not compatible with an investor's genetic predisposition.

One of the nice things about this study is that it also confirmed a point I have been making since 1995 after reading various studies that showed investors' actions were hurting their returns. By showing that genetics are more important than other factors such as education, income or net worth, it confirms my observations that accredited investors aren't necessarily sophisticated just because they have a million-dollar net worth.

Over the years, I have had the pleasure of dealing with literally hundreds of accredited investors who, in general, are individuals with at least million-dollar net worths. Though each qualified as a "sophisticated investor" under SEC rules, I can tell you that not all accredited investors fit this description. At the same time, I have worked with many very sophisticated investors who did not have a million-dollar net worth and would not qualify as accredited investors. I believe the Nature or Nurture study helps to explain these observations.

A final implication from the Nature or Nurture study has to do with a possible regulatory reaction. The authors of the study specifically state that the results are also relevant "…for the effectiveness of public policy intervention related to financial markets." This naturally causes those of us in the financial services industry to wonder if there will be a regulatory reaction to this and possible future studies showing a genetic link to investment behavior.

We are currently in a very friendly environment for additional regulation on the financial sector, so I wouldn't be too surprised if regulators pick up on this study and begin investigating ways to compensate for detrimental genetic behavior.

What About Investment Professionals?

Another, less obvious, observation we can make is that professional money managers, being human, also have a genetic predisposition toward taking risk and managing money. Unfortunately, the Nature or Nurture study didn't delve into investment behavior related to managing other peoples' money, but it does raise the question of how to know if your money manager is genetically suited to manage your money.

I recently wrote about how most mutual fund managers don't invest in their own funds. As I think about that situation in light of the Nature or Nurture study, it may be that whether or not money managers "eat their own cooking" may be a way to help us identify their genetic investment behavior.

Not investing in their own programs was already a major red flag in our due diligence process, but even more so in light of the findings of the Nature or Nurture study. If mutual fund managers don't invest in their own funds, could it be that they are not genetically suited to be making that type of investment? If so, do you really want them to manage your money?

Another possible genetic clue to a professional money manager's behavior may be a tendency to not trust their own trading model and override its signals. While many money managers use discretion to one extent or another, others use 100% mechanical systems to manage funds. Such a systematic approach helps to allay any concerns about knee-jerk reactions to market events that might otherwise cause an emotional response.

However, we have seen Advisors in the past who have chosen to override their own systems' signals because of extended losses or in an attempt to produce higher returns. While it's usually hard to tell for sure, such actions are often the result of emotional trading and might just be due to the genetic behavior component of the manager. If a money manager routinely overrides trading signals for reasons other than a national emergency (such as the 9/11/2001 terrorist attacks), we don't let them manage our clients' money.

Overcoming Genetic Behavior

The combination of the Dalbar QAIB and Nature or Nurture studies provides the groundwork for explaining why investors are often their own worst enemies. Whether the cause is lack of experience, emotions or genetics, the end result is the same – poor investment results due to frequent switching. If you want to break this cycle, you need to find a way to overcome the habits that lead to poor investment results.

Unfortunately, the authors of the Nature or Nurture study didn't provide any clues as to how to overcome any detrimental genetic investment behavior other than the general reference to investor education discussed above. However, I believe there are ways to avoid falling into the traps laid by genetic behavior, including frequently jumping from one investment to another.

When I first read the Dalbar QAIB study back in 1995, my reaction was that many investors are going to follow their emotions rather than adhere to learned behavior. We now know that these emotional responses are often due to genetic makeup, but the result is the same – nature trumps nurture. The question then becomes how to minimize genetic behavior that may be detrimental.

The solution I developed was to provide investors a way to outsource the decision-making process. We call this solution AdvisorLink® and I have written about this program many times in past E-Letters. Rather than repeating all of the benefits of AdvisorLink®, let me concentrate my discussion on how this program can help overcome detrimental genetic investment behavior that might cause an investor to frequently switch among investments.

First, the daily decision-making task is put in the hands of investment professionals who have met our strict due diligence criteria. Access to money managers who have successfully navigated a variety of past market environments can help risk-averse investors realize that they need to turn over the reins of their portfolios. Investors often find there is no longer a need to constantly watch the market or the financial media, freeing up time to do the things they want to do.

Next, AdvisorLink® helps manage risk by focusing on investment strategies that have the ability to move to cash or hedge positions in bear markets or major corrections. In buy-and-hold portfolios, investors are told to "stay the course" when inevitable losses occur. However, many reach their emotional loss limit and bail out, some never to return to the market. By offering only "actively managed" investment strategies, AdvisorLink® allows investors to rely on professionals to make the decisions regarding when to be in the market and when to be out.

AdvisorLink® can also be a resource for investors whose genetic nature is to be more aggressive. Some of our recommended Advisors use leverage and even "short" trades to potentially add value for aggressive investors. These programs not only offer risk management, but also have the potential to post gains in down markets. There are no guarantees, of course.

Today as we seem to see a new fraud or Ponzi scheme exposed almost every week, it is refreshing to know that all AdvisorLink® accounts are fully transparent, liquid and under your control. Your money is held in an individual account in your name, not in a commingled omnibus account. Each custodian we use offers 24/7 online access to your account information and you can withdraw money at any time during the month. You simply authorize a professional money manager to trade your account on your behalf and withdraw their management fees periodically.

Finally, investors also have the knowledge that we monitor the performance and trading of each AdvisorLink® money manager on a daily basis. This way, investors know that a professional is not only managing their money, but there are also professionals "managing the manager." As always, I have my own money in every investment program we offer.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.


Each time I write about studies showing how investors sometimes can be their own worst enemies, I am amazed at the number of readers who respond saying that the study actually described their own experience. I suspect that some of you reading this E-Letter see yourselves in the Dalbar and Nature or Nurture study results. You've gone to all the right classes, read all the right books and listen to CNBC daily, but still make emotional investment decisions despite all of this educational exposure.

Or, your genetic behavior may tend more toward aggressive investments that use leverage and short positions to maximize potential profit, albeit at greater risk. You may even be an investor who has successfully managed your own account for years, but are now ready to spend your time on other things and let a professional manage your portfolio.

In any of these situations, AdvisorLink® might just be the suitable alternative you are looking for. If you'd like to learn more about this innovative program, please feel free to give one of our Halbert Wealth Management Investment Consultants a call at 800-348-3601. You can also send us an e-mail at [email protected], or obtain more information on our HWM website at We look forward to hearing from you.

Hoping your genes are good ones,

Gary D. Halbert


Formidable Headwinds Lie Ahead

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In our December 1 E-Letter, the table reflecting increases in tobacco taxes incorrectly identified an increase from $1.10 per pound to $24.78 per pound as being for pipe tobacco when this increase was actually for RYO (roll your own) tobacco. The correct tax increase for pipe tobacco was from $1.10 per pound to $2.83 per pound, an increase of 158%.


"Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend any product or service advertised herein, unless otherwise specifically noted."

Forecasts & Trends is published by ProFutures, Inc., and Gary D. Halbert is the editor of this publication. Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgment of Gary D. Halbert and may change at any time without written notice, and ProFutures assumes no duty to update you regarding any changes. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Any references to products offered by Halbert Wealth Management are not a solicitation for any investment. Such offer or solicitation can only be made by way of Halbert Wealth Management’s Form ADV Part II, complete disclosures regarding the product and otherwise in accordance with applicable securities laws. Readers are urged to check with their investment counselors and review all disclosures before making a decision to invest. This electronic newsletter does not constitute an offer of sales of any securities. Gary D. Halbert, ProFutures, Inc. and all affiliated companies, InvestorsInsight, their officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Securities trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results.

Posted 12-08-2009 4:24 PM by Gary D. Halbert


Julia and Damon Mercer wrote re: My Genes Made Me Do It!
on 12-09-2009 4:56 PM

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