Why Do Individuals Exhibit Investment Biases?

A working paper by:  Henrik Cronqvist  (Claremont McKenna College – Robert Day School of Economics and Finance) and Stephan Siegel (University of Washington – Michael G. Foster School of Business)

Abstract: 
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. Genetic factors explain up to 50% of the variation in these biases across individuals. We find no evidence that education is a significant moderator of genetic investment behavior. Genetic effects on investment behavior are correlated with genetic effects on behaviors in other domains (e.g., those with a genetic preference for familiar stocks also exhibit a preference for familiarity in other domains), suggesting that investment biases is only one facet of much broader genetic behaviors. Our evidence provides a biological basis for non-standard preferences that have been used in asset pricing models, and has implications for the design of public policy in the domain of investments.

Full paper here and here