10/10/2010 09:44 am ET | Updated Nov 17, 2011

How Nature Vs. Nurture Impact Your Spending Habits

You may have seen it before -- two siblings grow up to have radically different financial personalities, from their savings rates and spending habits to their attitudes toward debt. Or maybe one is a financial risk-taker with a portfolio of exotic investments, while the other is content with slow-and-steady rates on savings accounts.

How do you explain these differences? In a recent paper, a group of academic researchers looked at how nature and nurture affect financial behavior. They found that both nature and nurture play a role but that the influence of nurture changes as individuals accumulate experience over time.

The following are some observations on the paper "Nature or Nurture: What Determines Investor Behavior?" by Amir Barnea, Henrik Cronqvist and Stephan Siegel.

Nature and Financial Behavior

The study looked at the financial portfolios of twins. Because Sweden happened to have both a registry of twins and detailed financial information on individuals, the researchers were able to examine portfolios of over 37,000 twins, as well as a pool of non-twins of the same size. They sorted the twins into identical and fraternal categories to account for the degree of genetic similarity and also distinguished between twins raised together and those raised separately to identify differences in experience, or nurture.

The authors compared similarities and differences in portfolios with known shared environmental factors -- i.e., upbringing and personal experiences. They deduced that any unusual degree of similarity in the portfolio behaviors of twins that is not explained by environmental correlations is explainable by genetic factors.

Based on this methodology, the authors concluded that about one-third of portfolio behavior is genetically determined. Perhaps what is most striking is that this genetic factor appears to be lasting, even as each individual acquires a unique set of experiences.

Nurture and Financial Behavior

If nature, or genetics, accounts for one-third of financial behavior, does that mean that nurture plays a dominant role? Not necessarily. The researchers found that upbringing is an important factor in the investment behavior of young people but that its effect is replaced over time by the accumulated life experiences of the individual.

Another way to think of this is that, while your genetic makeup is permanent, your experiences are continually evolving. Childhood experiences are important, but as you age, other experiences become more significant.

Introducing Self-Determination

What does this mean to individuals who want to acquire better financial habits such as raising their savings rates? The study suggests that the die isn't already cast by your genetic makeup and your past experiences. As important as genetics and upbringing are, one of the most encouraging things about this study is the changing influence of experience over time.

In short, people can change their spending patterns, savings rates and investment decisions as they mature. Experience can be a teacher, and it can be a good teacher if you make it your business to improve your financial literacy and examine your decisions rationally.

You can't do anything about your genes, but you can influence your experiences. A little self-determination can help you break out of old habits and reinforce good savings behavior through first-hand practice. Nature and nurture may be powerful influences on financial habits, but self-determination allows you to alter the type of financial nurturing you give yourself over time.

The original article can be found at
Nature, Nuture, and Savings Rates