Its been well-documented that, on average, retail investors are dumb money. For example, on average, the stocks they buy go on to underperform and the stocks they sell go on to outperform. Investors, sadly, even manage to underperform the very mutual funds in which they invest.

Research from the field of behavioral finance has provided explanations for these poor results. In short, theyre the product of a long list of investment biases exhibited by individual investors. Among these biases are: Investors lack portfolio diversification due to overconfidence and a preference for investing in familiar securities (a home-country bias); they tend to trade too much (overconfidence again); they are reluctant to realize their losses (it is too painful to admit mistakes); they extrapolate recent superior returns into the future (the hot-hands fallacy); and they have a preference for skewness and lottery-type investments (which is explained by prospect theory).

While studies have shown that individual investors, on average, exhibit investment biases, little research has been devoted to uncovering their origins and the differences in them across investors. This, in turn, raises two questions: Are investors genetically endowed with certain predispositions that manifest themselves as investment biases? Or, do investors exhibit biases as a result of parenting or individual-specific experiences or events?

Investment Biases And Genetics

Henrik Cronqvist and Stephan Siegel contribute to the literature on investment biases with their study, The Genetics of Investment Biases, which appeared in the August 2014 issue of the Journal of Financial Economics.

To answer these questions, they used a unique data set, the worlds largest twin registry, the Swedish Twin Registry, and then matched it with detailed data on twins investment behaviors. This enabled them to decompose differences across individuals into genetic versus environmental components.

The decomposition was based on an intuitive insight: Identical twins share 100% of their genes, while the average proportion of shared genes is only 50% for fraternal twins. If identical twins exhibit more similarity with respect to these investment biases than do fraternal twins, then there is evidence that these behaviors are influenced, at least in part, by genetic factors.

The authors database included more than 15,000 sets of twins. Following is a summary of their findings:

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Swedroe: Investing Habits Affected By Genetics - ETF.com