One of the more esoteric topics that fascinates me about the psychology of investing is whether our risk preferences are determined by our genes or our environment. I have written about that in a past paper, but now a new study has shed some additional light on this topic.
The most common approach to examine what share of our risk preferences are genetically coded is the ACE model of twin studies. In essence, you ask many monozygotic and dizygotic twins to fill out the typical questionnaires to elicit risk or time preferences.
The risk preference questions are the common ones in the style of ‘Do you prefer the safe choice with payoff X or the risky choice with a potentially higher payoff Y or a certain possibility of losing Z?’ Time preferences are elicited with the usual tradeoff questions, such as ‘Do you prefer small payoff X today or larger payoff Y in a year?’
Then, you can use the results to differentiate between similarities and differences in behaviour between twins. The share of risk preferences that explains the behaviour of both twins is either due to the genetic component (A for the additive genetic component) or the shared common environment (particularly during childhood, abbreviated with the letter C). The share of risk preferences that differs between twins is due to the unique environment of each twin (abbreviated with the letter E and typically the individual lifetime experiences of each person).
By comparing monozygotic twins which have the same gene code and dizygotic twins which have different gene codes and are no different than any other siblings, one can further differentiate between the influence of genes and the shared common environment during childhood.
The resulting split between the three components of this so-called ACE model is one where about 25% of risk preferences are attributed to genetic drivers and 68% to the unique environment, while the common environment is of negligible importance. When measuring time preferences, the results typically indicate 38% heritability and 58% of preferences due to the unique environment.
However, the new study made a keen observation. All these measurements are subject to measurement error and this measurement error looks just like the influence of the unique environment of the person answering the questionnaire. Hence, the influence of the unique environment may be vastly overstated in past studies.
Using a rather complicated econometric approach that in my view makes a lot of assumptions I am not willing to take for granted, the authors try to estimate the three components while also accounting for possible measurement errors. Their results are contrasted with the average of previous studies below.
Influence of ACE factors on risk and time preferences
Source: Kettlewell et al. (2023)
In general, the new study finds a significantly smaller genetic influence for time preferences and a significantly larger genetic influence for risk preferences. However, and this is the only important conclusion I would take with me, of the three components, the unique environment is always the most important driver of risk preferences and time preferences, no matter which methodology one uses.
We are not slaves of our genes and no matter what happens to us in life it is not a result of our genetic make-up or our shared environment. The key driver of our life is what we make of it. And this is great. As I said in a post last year, we can achieve anything, if we just set our mind to it. And that is the great thing about life. It truly is what you make of it.
Klement: We are not slaves to our genes, we can achieve anything, if we just set our mind to it.
Me: *looks at expaneding waistline, looks at extra slice of cake, promises self not to eat more cake, eats more cake* *through mouthfull of cake, spraying crumbs onto phone screen* Yes, this guy's right
'We are not slaves of our genes and no matter what happens to us in life it is not a result of our genetic make-up or our shared environment. The key driver of our life is what we make of it'.
This is all fine but it's an opinion. Both matter. And genetics apparently only if you leave the parental home young enough, as the last part of my comment shows.
One very interesting writer on environment is Rob Henderson ('Luxury Beliefs'), i highly recommend his Substack, a common sense academic if there ever was one, and a healthy antidote to woke academic and media nonsense. One of his core beliefs and backed up by plenty of studies: a poor youth does not create crime, drug use etc but a chaotic youth does. It's not money but stability that matters.
His background is similar to Hillbilly elegecy's J D Vance: chaotic upbringing, then 4 years in the airforce, then psychology at Yale and Cambridge. What saved him as a child was (finally) a pair of stable foster parents and a high school teacher who stimulated him to join the airforce. He dismantles the impact of elite pet peeves on his (non) working class background here:
The Grand Canyon-Sized Chasm Between Elites and Ordinary Americans
https://www.robkhenderson.com/p/the-grand-canyon-sized-chasm-between
Here he tells a little bit about his upper classmates at Yale (WsJ):
https://www.robkhenderson.com/p/luxury-beliefs-that-only-the-privileged
Genes / mom and pop:
The discussion on genes, environment and outcomes is far from settled. And doesn't 'progress' easily since some sub fields like intelligence & genetics are very controversial - you know why - and resisted by the mainstream for reasons of moral 'cleanliness'. Since via genetics you end up at race / ethnicity...
But intelligence is widely understood to be a result of both hereditary ie genetic input and environment, with most scientists, philosophers, social scientists and media figures greatly preferring the environmental part of it. For obvious reasons.
Conservative writer and Cambridge fellow Nathan Cofnas (philosophy, biology - also Substack) looks at the more 'questionable' part and is often attacked.
But, if you look at the 'arguments' of his many detractors (who often don't even read his papers, the topic is enough to enrage them. One of them - a philosopher - tweeted 'more of this please' when a Trump supporter died after jan 6), it seems they also haven't been that richly rewarded on top...
These two articles show his detractors at work. The first also contains a few quotes of social science big shots like Chomsky who, in my words, basically state 'some things we shouldn't want to know'...
I'd say that's exactly where scientists should be poking...
https://thecritic.co.uk/my-debunked-views/
https://thespectator.com/topic/academics-get-paper-retracted-some-havent-read-nathan-cofnas/
In the US the environmental effect seems to have stalled: last year a Canadian study showed that 'undergraduates' IQs have steadily fallen from roughly 119 in 1939 to a mean of 102 in 2022, just slightly above the population average of 100'.
The study has suddenly disappeared from its journal at frontiersin.org/journals/psychology but is discussed here: https://bit.ly/3OKtG3o
This study below on twins (limited samples and all that but still interesting) showed that genetics only begin to have an influence around the age of 21. And ONLY when subjects left their parental home:
Discussion:
'The onset of genetic influences at young adult-hood, however, challenges conclusions drawn from theexisting literature. Our analyses suggest that the onsetof genetic influence occurring at about ages 21–25 arerooted in life cycle changes from leaving the parentalhome. There was no evidence of genetic influences onthe attitudes of twins still living with their parents atages 21–25; only twins who no longer shared the par-ental home showed strong evidence of genetic influ-ences on this index of liberal-conservative attitudes'.
https://www.researchgate.net/publication/231829764_Genetic_and_Environmental_Transmission_of_Political_Attitudes_Over_a_Life_Time
And that immediately has you think about US adolescents no longer leaving their parental homes at an early age since the gfc.
While recently in western Europe in many cities the pressure (native high incomes, immigration, refugees, foreign students) on an insufficient supply of (cheap enough) housing is showing the same pattern.
And students' parents are not seldomly progressive gen x-ers and early millennials.
I think Nathan Cofnas will have to stay in his niche for a pretty long time...