Are You a Born Financial Risk-Taker?

December 14, 2010
Shirley M. Mueller, M.D.

A study of Swedish twins found evidence that financial risk-taking is hereditary. As we know, the willingness to take on too much risk can be detrimental to your wealth. To find out whether you've inherited a high risk tolerance, or adopted a conservative streak, take this quiz.

A new study found that monozygotic twins (identical twins) are more alike in their financial decision-making than dizygotic twins (fraternal twins) when both sets are raised by their respective parents. This difference offers the perfect natural experiment: By comparing the results of identical twins sharing the same environment and genes to the fraternal twins with different genes, but also an identical environment, any higher significant correlation in the identical than the fraternal is taken as evidence that there is a genetic variation in the trait studied.

This was the basis of the study “Genetic Variation in Financial Decision Making,” published by David Cesarini and colleagues in the September 2010 issue of The Journal of Finance. Researchers looked at the investment choices of Swedish adults in Fall 2000 after a sweeping pension reform that forced participants to construct a new portfolio from multiple options.

Data from these investment decisions were matched against the Swedish Twin Registry. When analyzed, the study showed that about 25% of individual variation in portfolio risk-taking was due to genetics. The researchers’ results were the first to document the inheritability of risk-taking in financial markets.

What this study tells us is that we are born with a certain level of willingness to take financial risk -- and that an overabundance of this willingness could prove detrimental. To figure out your own risk tolerance, two personal finance professors at New Jersey’s Rutgers University have created a quiz. Taking it can help. For those that come up with a high risk tolerance, recognizing the tendency can be beneficial in itself.