Nature, Nurture, and Financial Decision-Making

Abstract

The goal of this application is to fund a research agenda in economics that examines the importance of nature (genes) and nurture (the environment), and their interactions, as drivers of individuals' behavior in the financial domain. The goal of this agenda is to advance our understanding of the fundamental factors that determine the most important financial decisions that people make during their lives, e.g., how much to save for retirement, how to invest and allocate savings to different assets and investment vehicles, and how much personal debt to accept. Many industrialized countries are moving away from defined benefit retirement plans and pay-as-you-go systems like Social Security, meaning that people will be responsible for their own savings. As we move towards more autonomy in the domain of savings and investments it becomes increasingly important for economists and policy makers to understand what determines people's financial decisions and also why people exhibit a long list of investment biases. Is this because of genetic predispositions, or because of social learning (e.g., from parents)? Does the environment moderate innate predispositions to certain financial decisions? The extent to which specific environments and market incentives eradicate or exacerbate genetic predispositions will also be examined. There are at least two reasons why this research agenda is important and has potential for broad impact. First, economists who model or empirically examine individual investor behavior in financial markets should understand the fundamental factors that explain individual differences in behavior in these markets. In this respect, our research contributes to a rapidly expanding literature which analyzes the biological, neural, and genetic factors that influence individuals' financial decisions. Second, from a public policy perspective, it is important to understand the extent to which individuals' financial decisions are influenced by genetic predispositions rather than environmental factors. That is, our results have implications for an evaluation of the effectiveness -- and possibly limitations -- of public policy initiatives with respect to, e.g., financial literacy, retirement savings, income and wealth inequality.