“Parents, Beware: Your Children Will Invest Like You Do.”
This headline caught my attention in The Wall Street Journal last week. In all my studies, I have never come across any research that demonstrated a link between the investing behaviours of parents and children, until now.
The author of the article highlights a July 2015 paper, “On the Origins of Risk-Taking.” Here, the researchers take as their starting point the observation that parents who hold equities (“riskier” financial portfolios) are more likely to have children who also hold equities.
What’s behind the persistent level of equity tolerance across generations? The researchers studied data on a unique adoption system in Sweden that links children to both their biological and adoptive parents. They found that when parents participated in the stock market, the children were 34% more likely to do so. They also found environment had a relatively stronger influence than genetics on equity risk-taking by children; in other words, there is a case to be made that a child’s investment behaviour is learned.
At Burgundy, we often talk about behavioural biases that influence investment decision-making away from reason and logic. For example, recency bias might influence an investor to think that recent performance will continue along the same trajectory into the future. Home bias might influence an investor to prefer domestic Canadian equities as opposed to diversifying their portfolio globally. Confirmation bias might influence an investor to look for evidence that proves her investment thesis, while ignoring signs that contradict it.
The recent findings on learned equity tolerance remind me of the behavioural bias known as anchoring. In this bias, investors might base their investment-decision making on the first source of information they receive, and be unable to change their views in relation to new information. So, a child may anchor on his parents’ experience of the equity markets, positive or negative, and adjust his equity allocation upwards or downwards in relation to his parents’ original experience. He has “learned” to be risk-tolerant or risk-averse.
What can children do knowing that they have likely inherited their parents’ investment behaviour, good or bad? The key is to go wide – that is, avoid anchoring on your parents’ specific experience and consider a range of investment choices in relation to your own specific investment goals.
And what can parents do knowing that their own investment decisions are likely influencing their children’s investment behaviour? Take the time to learn how to make good investment decisions. Your children and grandchildren will thank you.