Swedroe: Genes, Experience Affect Choices

November 02, 2015

Are you a value investor or a growth investor? Could your preference be influenced by a biological predisposition partially ingrained from birth? Is it possible that your choice of investment could be explained by your personal experiences, both early on and later in life?

The field of behavioral finance advances psychology-based theories to explain investor behavior, behavior that can lead to anomalies that can’t be explained by an efficient market made up of investors who always act rationally.

Henrik Cronqvist, Stephan Siegel and Frank Yu—authors of the study “Value Versus Growth Investing: Why Do Different Investors Have Different Styles?”, which appears in the August 2015 issue of the Journal of Financial Economics—contribute a new perspective to the long-standing debate over the two different styles of investing: value and growth.

Today there are more than 2,000 value funds and about 3,200 growth funds that cater to investors with a preference for this pair of investment styles. For more than two decades, Morningstar has provided investors with tools to help them choose a fund with their style of choice. And of course, there are hundreds of books promoting these two very different styles.

The question Cronqvist, Siegel and Yu sought to answer is: Why are some investors relatively more value-oriented, while others are more growth-oriented?

Biology & Environment

Since human beings are all shaped at least to some degree by both genetics and our experiences, it seems reasonable to expect that our views on investing would also be shaped by these two factors.

For example, research on human behavior has found that an individual’s core beliefs and preferences seem to crystallize during a period of greater neurological plasticity in early adulthood, the so-called impressionable years, and remain largely unchanged thereafter.

Thus, it should come as no surprise that research has found experiencing an economic recession during the impressionable years (18 to 25 years old) significantly affects redistribution and political preferences much later in life.

Cronqvist, Siegel and Yu’s study offers evidence supporting this concept when it comes to our investment choices. They show that differences in investment styles across individuals stem from two nonmutually exclusive sources: a biological predisposition that translates into a preference for value or growth stocks; and environmental factors that determine an individual’s portfolio tilt with respect to value and growth.

To study the extent to which variation in investment styles across a large sample of individual investors reflects innate differences, the authors employed data on identical and fraternal twins.

They constructed their dataset, which included 10,490 identical twins and 24,486 fraternal twins who invest in the stock market, by matching a large number of twins from the Swedish Twin Registry, the world’s largest twin registry, with data from individual tax filings and other databases. The study covered the period 1999 through 2007.

Research Results

Following is a summary of the authors’ findings:


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