Tracking Investment Traits

SUSIE GHARIB: So what determines your investment personality? Is it being born to the right parents? Having a lot of money? Being male or female? Research suggests the answer may be all of the above. In tonight’s “Your Mind and Your Money” segment, Dan Grech says while some of our investment traits may be inherited, others may develop over time

DAN GRECH, NIGHTLY BUSINESS REPORT CORRESPONDENT: When it comes to investing, we’ve seen how some people claim to be born gamblers. They have no problem taking big risks. And some studies suggest that could be an inherited trait. But what if risk tolerance is actually something you develop — say, as a result of your life experiences? And if that’s true, how would a person who lived through the great depression feel about risk? Let’s go back in time, to the 1930s. Beverly Bierman is 87 years old and she remembers the depression vividly.

BEVERLY BIERMAN, BERKELEY, CA: A lot of times, you’d walk the street and you’d see furniture on the sidewalk. It was a terrible thing. People, they were evicted because they couldn’t pay the rent. And we felt so bad for these poor people.

GRECH: Since then, Bierman’s been very conservative with her finances. And she’s not alone. A study called depression babies found many members of her generation tend to shy away from risky investments, even decades after the depression. The study’s co-author is economics Professor Ulrike Malmendier of the University of California-Berkeley. She says the depression baby study shows early life experiences play a big role in shaping investment attitudes.

ULRIKE MALMENDIER, ASSOC. PROF.,ECON., UNIV. OF CAL./BERKELEY: Environment does matter and being scarred for life is a very good way to think about it. A person who has gone through a big economic downturn like the great depression or even think about the current financial crisis, will be a different person afterwards. We will see a significantly different investment behavior.

GRECH: Malmendier found the depression left the biggest investment scars on those who were young adults at the time. She says most eventually recovered, as the turmoil became a smaller part of their life experience.

MALMENDIER: But then you also see that 10 years after, 20 years after, 30 years after — the effect becomes less and less and less.

GRECH: That also happens with people who get their money values from their culture. Take immigrants from China who move to America. A new study shows that when Chinese immigrants first arrive, they tend to be big savers and to invest in hard assets — just like people in China. But, finance Professor Meir Statman of Santa Clara University found that over time, they alter their money habits.

MEIR STATMAN, FINANCE PROFESSOR, SANTA CLARA UNIV.: When we move from one culture to another, from one country to another, we of course observe the new culture and we learn. And in time, we meld the two. So, Chinese Americans are more willing to take risks than people who have been in the United States for many generations, but not as much as people in China.

GRECH: Unlike your culture or your memory, one thing that doesn’t fade over time is gender. Finance Professor Brad Barber of the University of California-Davis studied the records of 35,000 investors. He found a big difference between how men and women trade stocks.

BRAD BARBER, FINANCE PROFESSOR, UNIV. OF CAL./DAVIS: We came in thinking that men would trade more aggressively than women. What we did find was that men traded 50 percent more frequently than women. So, that’s consistent with this notion that men are more over confident than women.

GRECH: All three of the professors we talked with agree on one thing. They say our biases on money matters are both inherited and learned. They believe some may be built into our genetic code or our brains, while others arrive via our cultures or our life experiences. Still, how do we keep those mental biases from hurting our investment decisions? To find out, we went to this totally unbiased fellow primate. He can’t talk, but he seems to be saying keep your eye on the ball. For investors, that means stay focused on the facts. Dan Grech, NIGHTLY BUSINESS REPORT, Miami.

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