Genes and Investing

Economists work on the assumption that people act rationally. If only life were that simple! Investors certainly don’t always act as they should. Among other mistakes, they trade too much, do not diversify their portfolios enough and are reluctant to discard underperforming stocks. They may have been born to behave that way.

A recent study* into investment behaviour by Stephan Siegel of Arizona State University’s WP Carey School of Business, and Henrik Cronqvist of Claremont McKenna College, illuminates the role that genes play in determining investment decisions.


The authors examine the investment behaviour of 15,208 pairs of Swedish twins, using data from the country’s twin registry and its tax authority, which until 2007 kept records on every financial transaction. Controlling for various factors, they find that identical twins, who share all their genes, were more similar in their investing behaviour than fraternal twins, who share about half their genes.

The authors calculate that genetic factors account for between a quarter and half of the variations in irrational investment behaviour between individuals. These factors are at work across more dimensions than just investing.

Twins who showed a bias towards buying familiar shares rather than unknown ones, for example, also showed a preference for living closer to their place of birth and for marrying a spouse from the same region.

If genes explain up to a half of the variations in investment behaviour, what governs the rest? The authors also calculated the impact of shared environmental influences on the twins as well as the effect of experiences unique to one half of a twin pair. Common childhood experiences like schooling were found to have almost no influence on investment behaviour. But individual experiences explain half of the variations between twin pairs—as much as, and often more than, genes.

However, the study called "Why Do Individuals Exhibit Investment Biases?”, February 2012, has its limitations since it looks at data from only one country during a limited period of time.



adapted from The Economist

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Retail Fraud

TIMES may be tough, but women still need little black dresses to wear to parties. So some buy a fancy gown, dance the night away in it and then return it to the store, pretending that it does not fit. This is an example of a growing problem. Retailers call it “de-shopping”.

Return fraud is becoming more widespread. It cost American retailers $14.4 billion in 2011, according to the National Retail Federation, up from $9.4 billion in 2009.

Online stores are particularly vulnerable. Few people will risk buying something to wear without trying it on first, so cyber-retailers need to have generous returns policies. But other scams are gaining popularity, too. Electrical retailers say that some sports fans now “borrow” large high-definition televisions to watch big matches.

De-shoppers are becoming more organized, says Tamira King of Cranfield School of Management in Britain. They have worked out that returning items in a group, for example, is more successful, as managers worry about an ugly scene in their shops.

Most do not see their behavior as fraudulent, says Ms King. If retailers are gullible enough to take goods back, they think, then more fool them. Few will cross the line to shoplifting, which they (correctly) regard as criminal.

Stores can protect themselves. Many returns policies far exceed the minimum legal requirements, so there is room to be more strict. In 2009 Marks & Spencer, a British retailer famed for its no-questions-asked refund policy, reduced the window for returns from 90 to 35 days. It now has returns desks away from the shop floor. This makes shouters and screamers less likely to succeed. Many shops now also insist on identification checks, so that recidivists can be more easily tracked.

A delicate balance is needed. Having the best customer services can help a retailer stand out from its competitors. And irritating genuine customers is bad for business. So some shops also reward good behavior. One occasional shopper at Lord & Taylor, a fancy New York department store, was surprised to be presented with a VIP card, usually reserved for more extravagant customers. It was, the store said, because in 20 years she had not returned a single item.




adapted from The Economist

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