Is Risk Tolerance Genetic?
Today’s blog post comes from a conversation with the WhatCounts’s VP of Sales and Marketing. We are both in Seattle, WA for our Smart Marketing Roadshow event, and we get into a conversation about “Risk Tolerance”. He states clearly, “oh its genetic, you are just born that way”. Got me thinking, is that true? The official definition of “risk tolerance” is: The degree of variability in investment returns that an individual is willing to withstand. Risk tolerance is an important component in investing. An individual should have a realistic understanding of his or her ability and willingness to stomach large swings in the value of his or her investments. Investors who take on too much risk may panic and sell at the wrong time.
I read this and thought, “ha”, I would never sell too early, why?, I can’t sell the private stocks I gamble in…just saying. #Entrepreneur
I found a really interesting article about a study that was performed on identical twins, “Can’t stand putting your money at risk? Blame DNA” :
– I wonder if I have an identical twin somewhere (admit it – you think that would be awesome).
– The researchers chose twins as their subjects because identical twins share 100 per cent of their genetic material, while fraternal twins share only 50 per cent (the same level as any two siblings).
– By comparing the financial decisions of the two types of twins, the economists could investigate the degree to which reasoning errors in one twin would predict the same pattern in the other.
– 20 per cent and 30 per cent of the variation observed in people’s attitudes and behavior around money is influenced by information coded in their DNA.
– The researchers found that as much as 42 per cent of the diversity observed in financial decision-making could be predicted based on a person’s genetic background.
I found several other articles that made the counter argument, but I thought this one was most interesting because of the “twin angle”. I still have this strange feeling I have a twin somewhere – can you imagine two of me? This is really a “nature versus nurture” argument. I started thinking about my own “risk tolerance”, which by the way, is very high. Are my parents risk takers, no. My father was in prison for 25 years. (I still love throwing that out there, it freaks people out). My father worked at a prison for 25 years. I remember a story he told me, “when they introduced the 401K, I passed, and kept my pension, seemed like a scam”. I love that, can you imagine someone saying that today (ha, maybe everyone). My mother worked at Sears for a time and then raised my brother and I (she clearly has a high tolerance – maybe not risk – but her BS tolerance is sky high).
I have always been comfortable with risk. Is it confidence? Is it genetic? Is it life experiences? I believe the answer is all of the above. I do believe that being comfortable with risk is coded in early in life, but I also believe that as you experience risk turning to success your confidence grows and so does your risk tolerance.