Are Our Financial Habits All in the Genes?
Transcription of interview with Stephen Siegel on December 5, 2011.
Douglas Goldstein, CFP®, Financial Planner & Investment Advisor
Stephan Siegel is from the University of Washington’s Foster School of Business, which is in Seattle.
He looks at how our inherited genetic matrix is the single greatest determinant of an individual’s
propensity either to save or spend.
Douglas Goldstein, financial planner & investment advisor, interviewed Siegel on Arutz Sheva
Radio.
Douglas Goldstein: Some people manage to save, and other people have a hard time living hand
to mouth.
What is it that causes people to have this kind of difference?
Stephan Siegel: We have looked at basic differences across people with respect to the amount of
money they save out of their income versus the amount of money they consume or spend,
and we were able to basically distinguish the genetic factor from environmental factors.
In turns out that in the cross-section of people, about one third of the variation with
respect to their savings behavior is due to genetic differences and the remaining two
thirds are largely due to individual experiences, and then very little seems to be due to sort
of parental effects other of course that the genetic transmission that happens from parents
to their children.
Douglas Goldstein: What do you mean by individual experiences?
Stephan Siegel: By individual experiences in our setup, that’s basically everything
that is non-genetic and is not caused by other parental influences.
This could be mainly life experiences, job choices, or of course winning the lottery
and then making decisions based on that, something that distinguishes one person from his or
her family environment and other people in society.
Douglas Goldstein: Someone, for example, doesn’t have a good job.
He’s not well-educated and he just never quite seems to earn enough money.
That would be considered an individual circumstance that would perhaps make him someone who can’t
spend a lot because he doesn’t have a lot.
Stephan Siegel: To the extent that is not also due to genetic factors.
Many choices in life are also again expressions of the genetic makeup of a person.
Things like income, for example, or even job choices have been shown to have a genetic
foundation as well, to the extent that there are aspects of it that are not reflections
of this genetic makeup, and this will be individual experiences.
Douglas Goldstein: If your parents, let’s say, are good savers, you feel that learning
that at home watching your parents squirrel away 10 or 15% of their income every month
doesn’t train kids to become good savers as well?
Stephan Siegel: That’s what our results on average would suggest, that indeed once
we account for the genetic transmission that happens naturally from parents to their children,
there’s little else left that gets transmitted from parents to their children with respect
to their savings choices, but this is true on average.
It varies a little bit, for example, over the age of the person.
We do find that young adults, between 20 and 25, do show an influence of parental environment,
but that influence decreases quite rapidly and by the time that people reach the age
of about 40, the parental influence has gone down to zero, while the genetic influence
basically persists all the way until retirement, and that’s when our example ends.
Douglas Goldstein: How can you differentiate between genetic influence and parental influence?
Stephan Siegel: We make use of a very traditional twin study design where we basically have
access to two types of twins, which are identical twins and fraternal twins, and the difference
between the genetic similarity in these two twin types that allows us to differentiate
between genetic influence and parental influence.
Essentially, the identical twins are as they would suggest genetically identical, while
the fraternal twins are just like any other siblings that are on average genetically correlated
by about 50%.
If a given trait, in this case savings behavior, has a genetic basis, then we would expect
that the two identical twins on average behave more similarly than the fraternal twins.
We find that the identical twins in their savings decisions are more similar to one
another than the fraternal twins, and the excess similarity that we find in the identical
twins relative to the fraternal twins that allows us to ultimately estimate the importance
of genes versus the importance of nurture, which is assumed to be the same for both types
of twins.
Parents treat their children in our model at least the same way, no matter if the children
are identical or fraternal twins.
Douglas Goldstein: The model that you’re using is that you look at a pair of identical
twins and then you’ve discovered that they act similarly throughout their lives in terms
of saving, while the others presumably do not necessarily act as similarly.
Stephan Siegel: They still act similarly, so that’s why on average we find that children
are similar to their parents in many important financial decisions but they are not as similar
in their behavior as the identical twins and that is what sort of allows us to find
the genetic component.
Douglas Goldstein: Frequently, I find people either overspend or they don’t
save enough, and I try to coach them, encourage them, and control them to become more in tune
with their budget, and it just doesn’t always work.
Would you say this is simply a genetic problem?
Stephan Siegel: I think a part of the difference that you observe in your clients is due to
their genetic makeup.
Indeed, we have looked at other decisions that we can observe among our twins and we
do find for example that those save only a little are also more likely for example in
our dataset to smoke or to be obese.
So then this would suggest that there is a common cause that we can consider - maybe
lack of self-control to some extent, and we are further able to decompose this correlation
between these different decisions, savings on the one side and smoking and obesity if
you want on the other side.
We do find that the reason that these things are correlated is entirely genetic.
It is true that some of the variations are because of genetic factors and these genetic
factors seem to affect many aspects of a person’s life.
It’s also true that people can counter these genetic predispositions by making choices
in the form of delegating some of their financial decisions to, for example, financial advisors
so that their financial decisions are not affected that much by their genetic predisposition
to maybe save little.
Thinking about the welfare implications of these behavioral biases or just predispositions
that people have is quite difficult because your client might indeed be miserable if he
was forced to not spend as much as he would like to and therefore might not necessarily
be better off about being forced to do something which goes against his underlying nature.
At the same time, to the extent that choices are time inconsistent, that people realized
in the long run they would’ve been better off if they have saved more but in the short
run, they just find it hard to do so, then I think we could make an argument that constraining
them or forcing them to save more today might be better for them in the long run, but that’s
a very difficult question, which I think our study doesn’t provide an answer to.
We can just say that these underlying predispositions are very strong and powerful, but at the same
time, they don’t make up the entire differences that we observe.
There are elements of personal decisions that show up in the data that we observe, otherwise
our identical twins would have to behave exactly identically, which they don’t.
They just behave more correlated than the fraternal twins, but they don’t behave the
same way so they make decisions that are different from one another.
Douglas Goldstein: Have you identified the specific gene?
Can you give a blood test to someone and determine whether he’s a saver or a spender?
Stephan Siegel: Our study basically just talks about the broad sources or variations, so
we don’t identify individual genes.
We just identify the importance of genetic variation, and that’s about a third in the
cross-section that we look at.
There are other people that have studied gene association through certain behaviors, and
there have been a few genes that have been associated with impulsivity, which is one
element that you can think about of underlying impatience and ultimately savings decisions.
I think the idea of having a very complete model that would allow us to tell someone
based on their genome whether or not they are a saver or a spender is still a few years
away, but it’s completely possible at least that one day we can do something like that,
where you can see a genome scan of your clients and you could understand at least what their
genetic predispositions are and that might sort of tailor the solutions that you might
offer in a certain way, like you might impose lesser or fewer constraints given their underlying
predispositions.
Douglas Goldstein: When you did your study, did you look around the world?
Is there a difference in different cultures?
Stephan Siegel: Our study is completely confined to the setting in Sweden.
So our data comes from the Swedish twin study and all the subjects in our dataset are Swedish
citizens.
So we can only speak about the relevance of genetic variation relative to the environmental
variation in Sweden in the early 2000s, and therefore we cannot account for importance
in government regulation or cultural elements that clearly matter in cross countries.
Since we only have one country, we don’t know how important those elements are on a
global scale.
Douglas Goldstein: Do you think that the results of your study could be attributed to anything
other than genetics?
Stephan Siegel: The variation that we observed is not entirely genetic so in that sense,
yes 70% or 65% of the decisions people make with respect to savings decisions do reflect
other things.
These are individual experiences, but I think with respect to the genetic variation, we
are pretty confident that that is a reasonable estimate.
One concern that people often raise is that identical twins are more similar, not only
genetically but also in how they get treated by parents or other people in the environment.
So we actually do a robustness test where we look at twins that were apart and separated
early on in their lives and grew up in different households, and we do find that generally
the results are very similar.
The point estimates are [noisier] because it’s a very small set, but overall we do
find that there’s a significant genetic component of similar size and that explains
the differences in savings decisions in this much smaller set.
Douglas Goldstein: How could people follow your work or learn more about what you’re
doing?
Stephan Siegel: All of our papers are available on the Social Science Research Network, which
is www.ssrn.com, or people can just Google my name, Stephan Siegel, and they will immediately
find my website where all my papers are listed as well.
Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host
of the Goldstein on Gelt radio show (Monday nights at 7:00 PM on www.israelnationalradio.com.
He is a licensed financial professional both in the U.S. and Israel.
Securities offered through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA,
SIFMA.
Accounts carried by National Financial Services LLC.
Member NYSE/SIPC, a Fidelity Investments company.
His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered
at: www.profile-financial.com (02) 624-2788 or (03) 524-0942.
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