Are We Wired to Spend?

Could it be that when you splurge on that dinner in LA instead of dinner at Collins, you're acting out of pure genetics? In early October, The Moneyland section of Time Magazine devoted an entire page to Claremont McKenna College Professor Henrik Cronqvist and his recent study demonstrating that people are genetically wired to spend or save money.

Cronqvist and Stephan Siegel, a finance professor at University of Washington’s Foster School of Business, have been working on the study since 2008.

Professor Henrik Cronqvist

The book inspired Cronqvist to consider the role of genetic disposition in financial decisions. “I noticed that there was a lot of psychological research but not a lot of work in economics or finance. We (Cronqvist and Siegel) wanted to understand risk-taking in finance and were interested in roles genes and upbringings play.”

During the course of the study, Cronqvist and Siegel observed the spending and saving habits of 15,000 sets of Swedish twins from the Swedish Twin Registry. First established in the late 1950s, the Swedish Twin Registry (STR) has been an important resource for medical research and was first used to control for genetic inclination to cancer and cardiovascular diseases in a study on the effects of smoking and alcohol consumption. The STR is now used for several research projects rather than for medical reasons. Cronqvist and Siegel used STR to their advantage as they surveyed the registry for their research.

Cronqvist and Siegel used the database to examine the investing behavior of sets of twins. “The twins were asked through a survey if they wanted to participate," Cronqvist explained, "and there was a very high response rate of about 60-70%.”

To measure the twins spending and saving rates Cronqvist came up "with a proxy of how much they save based on their tax returns.” The results of the study demonstrate that genes do in fact play some role in spending and saving habits. After examining the financial behaviors of identical twins (sharing 100% of their genes) and fraternal twins (sharing on average 50% of their genes), identical twins in the study who were separated at birth showed the same spending and saving patterns despite living in different environments. Fraternal twins did not have exact spending patterns as the identical twins but were fairly similar. Although genetic predisposition doesn’t rule out all environmental influence on spending and saving, the study demonstrates that genetics may be the more important component.

Cronqvist and Siegel will continue research on this promising subject and have already written four papers dealing with genetic predisposition to spend and save. In the future, Cronqvist and Siegel will broaden their research to examine the psychological biases of people who invest. “We are hard wired to those investment biases," said Cronqvist. "The idea of loss aversion and people being reluctant to sell stocks that they have lost are some of these biases we have seem to have.”

Cronqvist is the McMahon Family Associate Professor of Corporate Finance and George R. Roberts Fellow at CMC and is currently on his sabbatical, splitting his time among Sweden, CMC, and his home in Los Angeles.