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Molecular Genetics, Risk Aversion, Return Perceptions, and Stock Market Participation

This discussion explores the significant heterogeneity in financial decision-making among individual investors. It delves into the nature versus nurture debate, the role of genetics in financial decisions, and the potential implications for public policy and industry.

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Molecular Genetics, Risk Aversion, Return Perceptions, and Stock Market Participation

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  1. Molecular Genetics, Risk Aversion, Return Perceptions, and Stock Market Participation Discussion by: Henrik CronqvistUniversity of Miami Business School The Rodney L. White Center for Financial Research Conference on Financial Decisions and Asset Markets March 22, 2019

  2. The Big Picture Significant heterogeneity across individual investors with respect to their financial decision-making. Why? Natureversus Nurture. Empirical methods: Twin studies. Gene mapping studies. Genome wide association studies (GWAS). …

  3. Nature and Human Behavior Many human behaviors (and diseases & disorders) have been studied: • Happiness • Height • Personality • Political Opinions • Substance Use/Abuse • Alcohol • Smoking • Academic Achievement • Body Mass Index • Cognitive Ability • Eating Disorders • Externalizing Disorders • ADHD • Antisocial Behavior • Internalizing Disorders • Anxiety • Depression What about financial decisions?

  4. Twin Studies Many human behaviors (and diseases & disorders) have been studied: Fraternal Twins Identical Twins Josefin and Elin Nordegren The Hodgson Twins

  5. Ideal Data on Twins…

  6. Positioning of the Paper Relative to Pre-Existing Research Genetics and risk preferences: Cesarini et al. (2009, QJE). Experimentally elicited risk preferences using data on twins. Gene mapping  Mechanisms: Kuhnen & Chiao (2009, PLoS ONE). Genetic and investment decisions: Barnea, Cronqvist & Siegel (2010, JFE) and Cesarini et al. (2010, JF). Register-based data using twins and financial portfolios. Paper in Nature in 2015: “Meta-analysis of the heritability of human traits based on fifty years of twin studies.” Paper re-emphasizes importance of genetics for financial decisions.

  7. Discussion: A Decade’s Worth of Comments For better or for worse…

  8. Comment #1:Academic Contribution Conclusions of Barnea, Cronqvist, and Siegel (2010, JFE): “About a third of the cross-sectional variance in [stock market participation] is explained by genetic differences.” Abstract of Sias, Starks, and Turtle (2019): “Approximately 30% of the relation between equity market participation and risk aversion arises from the proportion of risk aversion associated with these genetic endowments.” The 30% estimate is expected and not a significant contribution.  Expand on the contribution?

  9. Did Paper Change or Sharpen My Prior? • Paper did not changemy prior, but it did sharpen it!

  10. Comment #2:Data & Measurement Portfolios: Individual vs. Family? Stock market participation: Direct vs. Indirect. Selective sample?

  11. Comment #3:Frictions ≠ Risk Aversion Frictions.  Stock market participation. Risk aversion.  Proportion in risky assets. Paper: Risk aversion.  Stock market participation. What asset pricing model predicts no SMP based on a risk-aversion argument alone? In most models, even the most risk averse agents would allocate at least some of their portfolio to risky assets, i.e., they would be stock market participants.

  12. Comment #4:Public Policy and Industry Contributions What can we learn from molecular studies that is relevant for either public policy or industry? If we have information on an investor’s DNA: Can we undo cognitive errors? Can we “nudge” in favor of more optimal outcomes? Can we design more efficient portfolios?

  13. Being Constructive: One Potential Direction Nature versus Nurture. OR Nature through Nurture. Gene-Environment (GxE) interactions.

  14. Overall Conclusions Interesting and important paper! Definitely sharpened my prior in the domain of genetics and finance. Compress the writing and be more to the point (e.g. 53 footnotes!). Expand the innovativeness and contributions. Will enthusiastically read revised paper!

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