Differences in individual investor behavior stem from genetic predispositions and environmental factors. Several determinants play a critical role in why some individuals become value-oriented investors and others become growth-oriented investors.
Experiences in early adulthood can have profound implications on preferences later in life according to social psychology in neuroscience. A person's core beliefs seem to crystallize during this early period of great neuroplasticity and those beliefs remain consistent throughout a persons life. Researchers have shown that neural pathways and synapses can dramatically change during these formative years as a result of a persons environment, behavior, emotions and even injury.
Significant macroeconomic events that investors experience can also have long-term and persistent effects on that individual's behavior much later in life. The research shows that individual investors who experienced difficult economic conditions and crew up in lower income homes develop a more value-oriented investment style later in life. For example, people who grew up during the Great Depression subsequently favored value-oriented or 'cheaper' portfolios. These investors hold portfolios with than average P/E that is 11% lower than the median. The research also reveals that the timing of an individual's entrance into the labor market can affect that individuals future investment decisions. If an investor intern is the labor market during a severe recession, they favor more value oriented portfolios in the future.
Conversely, investors with more education with more disposable income and whose income is correlated with GDP favor growth investments. Additionally, investors who exhibit mora behavioral biases, such as the overconfidence bias, opt for growth investments. Individuals who exhibit more behavioral biases are found to have portfolios with a 10% higher P/E ratio than the medium.
Several studies contribute to and supports the growing body of evidence regarding behavioral finance, which demonstrates that life experiences, behavioral biases, and genetics have a dramatic impact on investors behavior. Click here to read my entire abstract article published by the CFA Digest. - Paul R. Rossi, CFA
Paul R. Rossi, CFA