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Why Do Individuals Exhibit Investment Biases?
Abstract and Figures
For a long list of investment "biases,'' e.g., home bias, loss aversion, and performance chasing, we find that genetic differences explain up to 45% of the variation across individual investors. The genetic factors that influence investment biases are also found to affect behaviors in other, non-investment, domains. This evidence is consistent with a view that investment biases are manifestations of innate and evolutionary ancient features of human behavior. The environment an investor experiences also affects investment biases, either directly or as a moderator of genetic predispositions. For example, we find that work-related experience with finance seems to reduce genetic predispositions to investment biases, while general education does not. Finally, even genetically identical investors, who grow up in the same family environment, often differ substantially in their investment behaviors due to individual-specific experiences or events.
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... The susceptibility to framing in decision-making varies substantially across individuals (De Martino et al., 2006; Kahneman and Tversky, 1979; Roiser et al., 2009; Sharp and Salter, 1997). Twin studies have established that the susceptibility to framing is moderately heritable (Simonson and Sela, 2011; Cesarini et al., 2012; Cronqvist and Siegel, 2012), suggesting that genetic factors are a strong factor underlying the individual difference in susceptibility to framing. In this study, we aimed to investigate whether a genetic polymorphism, COMT Val158Met (rs4680), which is related to negativity bias during emotion processing, was associated with individual susceptibility to framing. ...
... Previous research has shown that the individual difference in susceptibility to framing can be attributable to the differences in gene expression, with moderate heritability (Simonson and Sela, 2011; Cesarini et al., 2012; Cronqvist and Siegel, 2012 ). However, how genes influence this individual difference is still unknown. ...
Individuals tend to avoid risk in a gain frame, in which options are presented in a positive way, but seek risk in a loss frame, in which the same options are presented negatively. Previous studies suggest that emotional responses play a critical role in this "framing effect." Given that the Met allele of COMT Val158Met polymorphism (rs4680) is associated with the negativity bias during emotional processing, this study investigated whether this polymorphism is associated with individual susceptibility to framing and which brain areas mediate this gene-behavior association. Participants were genotyped, scanned in resting state, and completed a monetary gambling task with options (sure vs risky) presented as potential gains or losses. The Met allele carriers showed a greater framing effect than the Val/Val homozygotes as the former gambled more than the latter in the loss frame. Moreover, the gene-behavior association was mediated by resting-state functional connectivity (RSFC) between orbitofrontal cortex (OFC) and bilateral amygdala. Met allele carriers showed decreased RSFC, thereby demonstrating higher susceptibility to framing than Val allele carriers. These findings demonstrate the involvement of COMT Val158Met polymorphism in the framing effect in decision-making and suggest RSFC between OFC and amygdala as a neural mediator underlying this gene-behavior association. Hum Brain Mapp, 2016. © 2016 Wiley Periodicals, Inc.
... Other model specifications that use categories for education (< HS, HS, some college, college) decade-length age categories, and a dummy to separate larger households from smaller household generate similar non-signficant results. This is consistent with the findings of Cronqvist and Siegel (2012) who find that general education explains a minuscule fraction of the variation in financial biases. It is also consistent with a casual observation of the first table Almenberg and Gerdes (2012), in which there is no clear pattern between α as a function of education or income. ...
Exponential- growth bias (EGB) is the tendency for individuals to partially neglect compounding of exponential growth. We develop a model wherein biased agents misperceive the intertemporal budget constraint, and derive conditions for overconsumption and dynamic inconsistency. We construct an incentivized measure of EGB in a US-representative population and find substantial bias, with approximately one third of subjects estimated as the fully biased type. The magnitude of the bias is negatively associated with asset accumulation, and does not respond to a simple graphical intervention.
... This finding provides a microfoundation for the result documented byCronqvist and Siegel (2012) that there exists more similarity in the propensity to display investment biases among identical twins, relative to fraternal twins, suggesting that suboptimal behavior may have a genetic component.4 SeeGennaioli and Shleifer (2010) for a model of "local thinking" that is consistent with the observed importance of salience for belief formation. ...
The goal of this study is to ask whether investors learn differently from gains (positive news) versus losses (negative news), whether learning performance is better or worse when people are actively investing in a security or passively observing the security’s payoffs, and whether there are personal characteristics that correlate with learning performance. The experimental evidence documented here indicates that the ability to learn from financial information is on average worse in the loss domain, in particular if the investor has personally experienced the prior outcomes of the financial asset considered. Within individual, learning from gains versus losses, or during active versus passive involvement, are not perfectly correlated, indicating that there exists heterogeneity across people with respect to the type of financial information or context to which they are the most sensitive. Learning performance is determined by acquired financial expertise as well as by genetic factors related to memory and cognitive control.
Source preference in which equally distributed risks may be valued differently has been receiving increasing attention. Using subjects recruited in Berkeley, Fox and Tversky (1995) demonstrate a familiarity bias in source preference—betting on a less than even-chance event based on San Francisco temperature is valued more than betting on a better than even-chance event based on Istanbul temperature. Neophobia is associated with the amygdala which is GABA-rich and is known to be modulated by benzodiazepines as anxiolytic agents that enhance the activity of the GABAA receptor in processing anxiety and fear. This leads to our hypothesis that familiarity bias in decision making may be explained by polymorphic variations in this receptor mediated by anxiety regulation in the amygdala. In two companion studies involving Beijing-based subjects, we examine 10 single nucleotide polymorphisms (SNPs) of GABRB2 (coding for GABAA receptor, beta 2 subunit) and find 7 SNPs each showing negative association between familiarity bias—preference for betting on parity of Beijing temperature over Tokyo temperature—and having at least one minor allele (less than 50% prevalence). In an imaging genetics study of a subsample of subjects based on the SNP with the most balanced allelic distribution, we find that subjects’ familiarity bias in terms of risk aversion towards bets on the parity of the temperature of 20 Chinese cities is negatively associated with their post-scanning familiarity ratings of the cities only for those with no minor allele in this SNP. Moreover, familiarity bias is positively associated with activation in the right amygdala along with the brain’s attention networks. Overall, our findings help discriminate between ambiguity aversion and familiarity bias in source preference and supports our gene–brain–behavior hypothesis of GABAergic modulation of amygdala activation in response to familiarity towards the source of uncertainty.
We examine the effect of financial asset allocation and asset liquidity on individuals’ health. Earlier literature finds empirical evidence and provides theoretical justification of the impact of health on financial decisions but speculates that reverse causality is unlikely. Through panel data methods and an instrumental variable approach, we refute this claim and establish a causal effect of financial choices on physical and mental health outcomes. Our findings suggest that accounting for endogeneity changes the results from a basic specification. Stock holdings no longer significantly affect health while ownership of time accounts and retirement accounts have a strong positive effect on health outcomes. An exploration of the channels driving these effects provides confidence that the potential stress caused by the risk level of financial assets as categorized by the literature is not the primary driver of health outcomes. However, the findings support the time preference channel, i.e. willingness to forego financial satisfactions today in return for greater financial well-being in the future causes beneficial physical and mental health outcomes. There is also some support for the allostatic load hypothesis as well as a dopamine substitutability hypothesis.
This study aims to describe investor behavior in stock, mutual fund, and bank deposit. The psychology elements that are used in this research are mental accounting, representativeness, familiarity, considering the past, overconfidence, data mining, social interaction, fear and greed, status quo, and emotion. This research uses primary data with a help of questionnaire. The total respondent of this research is 110 people. Data collected by spreading questionnaire manually and online with the help of Google doc. The results showed that most of the respondents give positive respond to all of the elements. The element that has the highest mean value is familiarity element. It means that the respondent think that before they invest in something, they need to know first about that investment.
Enskilda individer ställs inför allt fler val i samhället. Valfrihet är viktigt men alla konsumenter har inte samma möjligheter att göra välinformerade val. Den växande mängden av finansiell information ställer också allt större krav på individens förmåga att sålla och bearbeta information. Därtill har produkterna blivit mer komplexa vilket ökat konsumenternas informationsunderläge. Därför är det viktigt att ha ett bra beslutsunderlag när man gör sina val. Regelverket kring finansiella tjänster har ökat markant, samtidigt som den teknologiska utvecklingen gjort det möjligt att sprida information på ett sätt som förr varit omöjligt. Finansmarknadskommittén har gett ekonomie doktor Anders Anderson och juris doktor Fredric Korling uppdraget att skriva en rapport som dels kartlägger och analyserar befintliga informationskrav, dels ger förslag som syftar till att förbättra dessa i förhållande till konsumenters möjligheter att ta till sig finansiell information.
Rapporten har diskuterats vid möten i Finansmarknadskommittén och kommer att vara diskussionsunderlag vid ett seminarium i juni i år. Slutsatserna i rapporten är författarnas egna.
Det är min förhoppning att rapporten ska medverka till ökad kunskap och även fungera som ett värdefullt bidrag i debatten om utformning av god konsumentinformation, både i Sverige och på EU-nivå.
Stockholm 5 juni 2012
Johanna Lybeck Lilja
Statssekreterare
Ordförande Finansmarknadskommittén
This paper investigates the dynamics of individual portfolios in a unique data set containing the disaggregated wealth of all households in Sweden. Between 1999 and 2002, we observe little aggregate rebalancing in the financial portfolio of participants. These patterns conceal strong household-level evidence of active rebalancing, which on average offsets about one-half of idiosyncratic passive variations in the risky asset share. Wealthy, educated investors with better diversified portfolios tend to rebalance more actively. We find some evidence that households rebalance toward a greater risky share as they become richer. We also study the decisions to trade individual assets. Households are more likely to fully sell directly held stocks if those stocks have performed well, and more likely to exit direct stockholding if their stock portfolios have performed well; but these relationships are much weaker for mutual funds, a pattern that is consistent with previous research on the disposition effect among direct stockholders and performance sensitivity among mutual fund investors. When households continue to hold individual assets, however, they rebalance both stocks and mutual funds to offset about one-sixth of the passive variations in individual asset shares. Households rebalance primarily by adjusting purchases of risky assets if their risky portfolios have performed poorly, and by adjusting both fund purchases and full sales of stocks if their risky portfolios have performed well. Finally, the tendency for households to fully sell winning stocks is weaker for wealthy investors with diversified portfolios of individual stocks. © 2009 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
A number of recent papers have examined the environmental and genetic sources of individual differences in economic and financial decision making. Here we contribute to this burgeoning literature by extending it to a number of key behavioral anomalies that are thought to be of importance for consumption, savings, and portfolio selection decisions. Using survey-based evidence from more than 11,000 Swedish twins, we demonstrate that a number of anomalies such as, for instance, the conjunction fallacy, default bias, and loss aversion are moderately heritable. In contrast, our estimates imply that variation in common environment explains only a small share of individual differences. We also report suggestive evidence in favor of a shared genetic architecture between cognitive reflection and a subset of the studied anomalies. These results offer some support for the proposition that the heritable variation in behavioral anomalies is partly mediated by genetic variance in cognitive ability. Taken together with previous findings, our results underline the importance of genetic differences as a source of heterogeneity in economic and financial decision making.
This paper was accepted by Brad Barber, Teck Ho, and Terrance Odean, special issue editors.
Despite our species' impressive cognitive sophistication, adult humans are nevertheless notoriously bad at making normatively rational economic decisions. Much work has examined the nature of biased decisions such as framing effects, the endowment effect, and the peak-end principle in adult humans; however, research examining the origins of these biases is still in its infancy. This paper examines existing work on origins of economic biases – that is, whether these biases are shared with non-human primates. We survey recent work using a comparative approach to address the evolutionary origins of several classic biases, such as loss aversion, reference-dependence, the endowment effect and the peak-end principle. Novel evidence is provided that the peak-end principle – a bias involved in retrospective evaluations – is also found in capuchin monkeys. These studies suggest that such biases emerged long ago in our evolutionary history, and shed light on the psychological mechanisms behind biased decision-making.
Reviews the book, Genes and behavior: Nature-nurture interplay explained by M. Rutter (see record 2006-01387-000). Surveying developments in behavior genetics, Michael Rutter provides an integrative synthesis in writing that is both important and timely. The book aims to offer a nontechnical account of the "various ways in which genetic influences on behavior may be important." To do so, Rutter reviews what is known of environmental influences and how genes and environments might work across development. The book is effectively organized. A first group of five chapters is devoted to quantifying the strength of genetic and environmental influences and illustrating study designs that do so. A second group of three chapters discusses specific genes known to influence behavior outcomes and offers a readable discussion of how such genes might actually work during behavioral development. Before a final summary, there are two provocative chapters; one discussing the role of GE interaction and correlation, and another focused on what environments can do to gene expression. This highly readable and largely nontechnical book provides the reader with insightful understanding of contemporary behavior genetic research. It deserves to be widely read. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Individual investors often invest actively and lose thereby. Social interaction seems to exacerbate this tendency. In the model here, senders' propensity to discuss their strategies' returns, and receivers' propensity to be converted, are increasing in sender return. The rate of conversion of investors to active investing is convex in sender return. Unconditionally, active strategies (high variance, skewness, and personal involvement) dominate the population unless the mean return penalty to active investing is too large. Thus, the model can explain overvaluation of 'active' asset characteristics even when investors have no inherent preference over them.