Why do people make different financial decisions? The role of genetic diversity

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Date and Time: 
Monday, September 26, 2016
2:00 pm – 3:30 pm
Speaker: 
Daniel Barth
Affiliated Faculty with CESR
Abstract: 

Recent advances in behavioral genetics allow us to relate genes to a variety of economic outcomes, including education, labor market performance and financial wealth. We build on this progress to demonstrate that the same genetic variants that predict educational attainment independently predict financial wealth in the Health and Retirement Study (HRS). We demonstrate, moreover, that this relationship is not merely mechanical: it is partly explained by higher earnings, but not fully. This leads us to explore the role of beliefs, financial literacy and portfolio decisions to explain how these genes predict wealth. We show that individuals with lower genetic scores are more prone to reporting ``extreme beliefs'' (e.g., reporting that there is a 100\% chance of a stock market crash in near future) and that they invest their savings accordingly (e.g., avoiding the stock market). Our findings suggest that genetic factors contribute to wealth disparities not only through education and higher earnings, but also through their impact on individual abilities to process information and make good financial decisions. We go on to assess whether the tendency towards extreme beliefs and financial illiteracy, despite its genetic basis, is malleable to factors such as childhood SES and access to education. This would justify policies that improve decision-making through provision of public education that improves probabilistic thinking.