The Biology of Investing

Why do people’s financial and economic preferences vary so widely? ‘Nurture’ variables such as socioeconomic factors partially explain these differences, but scientists have been discovering that ‘nature’ also plays an important role. This is the first book to bring together these scientific insights for a holistic view of the role of human biology in financial decision-making. Geneticists are now examining which genetic markers are associated with financial and economic preferences. Neuroscientists are now determining where in the brain financial decisions are made and how that varies between people. Endocrinologists relate the level of different hormones circulating in the body to financial risk-taking. Researchers are exploring how physiology and environmental conditions influence investment decisions, and how three types of cognitive ability play essential roles in investment success. This exciting and relevant work being done in these academic silos has generally not been transmitted among the scientific areas, or to industry. For the first time, this book integrates all these areas, explaining the myriad ways in which a person’s biology influences their investing decisions. Financial analysts, advisors, market participants, and upper-level undergraduate and postgraduate students of behavioral finance, behavioral economics, and investing will find this book invaluable, enabling a deeper understanding of investors’ decision-making processes. To further ensure this new material is accessible to students, PowerPoint slides are available online for instructors’ use.

List of Tables and Figures Chapter 1 Biology and Psychology in Finance Nature vs Nurture What Can We Learn from the Financial Decisions of Twins? Investment of Adoptees and the Human Genome Do Men and Women Invest Differently? Physiology Brain Function and Financial Decisions The Influence of Hormones on Financial Risk-Taking Sleep, Coffee, and Investing How Wellness Influences Financial Decisions Cognitive Outcomes The Emotional and Moody Investor Environmental Factors in Financial Decision-Making Personality and Investing Intelligence and Investment Performance Cognitive Aging and Diminished Decision-Making A Possible Future Notes Section I—Nature vs Nurture Chapter 2 Genetics: Twin Investment Behavior Twin Research: Nature, Nurture, and Unique Experiences Saving and Homeownership Saving Homeownership Risk Attitudes Investing Stock Market Participation Pension Choices Investing Style: Value versus Growth Behavioral Biases Well-being: Giving and Happiness Giving Happiness Summary Questions Notes Chapter 3 More Genetics: Investments of Adoptees and the Human Genome Adoption Introduction to Adoption Studies: Education and Income Investing Decisions Genome The Genome-wide Association Method Investing Risk Aversion Summary Questions Notes Chapter 4 Do Men and Women Invest Differently? Determinants of Gender Differences Gender Biology Societal Differences Financial Experimental Research Retirement Accounts Trading Behavior Gender in Corporate Finance Nature or Social Norms? Feminism and Masculinity Financial Literacy The Gender of Others Summary Questions Notes Section II—Physiology Chapter 5 Brain Function and Financial Decisions The Brain Anatomy of the Brian Neurotransmitters Types of Decision Processes Economic Decisions and the Brian Financial Risk and Reward Evidence from Brain Damage Biological Foundations of Behavioral Finance Genoeconomics Genoeconomics Research Genes and Receptors DRD4 and Financial Decision Making MAOA and Financial Decision Making Summary Questions Notes Chapter 6 The Influence of Hormones on Financial Risk Taking Hormones Hormonal Physiology Circulating Testosterone and Cortisol Levels Testosterone and Economics Risk Taking Cortisol and Economic Risk Taking The Dual Hormone Hypothesis Testosterone, Cortisol, and Financial Decisions Testosterone Proxies 2D:4D Ratio and Facial Masculinity Testosterone Proxies and Economic Risk Taking Testosterone Proxies and Financial Decision Making Testosterone Proxy Validity Summary Questions Notes Chapter 7 Sleep, Coffee, and Investing Sleep Physiology Sleep and Economic Risk Taking Sleep, Economic Risk Taking, and Brain Activation Sleep and Financial Decisions Country-wide Analysis Individual Focused Experiments Sleep Deprivation, Stimulants and Risk Taking Summary Questions Notes Chapter 8 How Wellness Influences Financial Choices Health and Obesity Exercise and Diet Physical Health and Financial Decisions Health and Portfolio Choice Health and Risk Taking—Experiment Evidence Employee Health and Company Performance Society Illness and Stock Market Performance Mental Health and Financial Decisions The Impact of Finance and Health Summary Questions Notes Section III—Cognitive Outcomes Chapter 9 The Emotional and Moody Investor Emotions, Mood, and Physiology Emotions and Economic Decisions Physiological Response to Economic Decisions Emotions, Mood, and Experimental Finance Loss Aversion and Affect Affect and Ethical Decision Making Aggregate Mood and the Stock Market Summary Questions Notes Chapter 10 How Environmental Factors Impact Financial Decisions Weather, Mood, and Financial Decisions Weather and Mood Weather and Experimental Finance Weather and Stock Markets Seasonal Affective Disorder Seasonal Affective Disorder and Physiology Seasonal Affective Disorder and Experimental Finance Seasonal Affective Disorder and Stock Markets Seasonal Affective Disorder and Financial Analysts Air Pollution, Cognition, and Financial Decisions Air Pollution and Cognition Air Pollution and the Stock Market Allergies and Financial Decisions Natural Disasters and Financial Decision Making Natural Disasters and Behavior Natural Disasters and Financial Decisions Terrorism and the Stock Market Terrorism and Behavior Terrorism and the Stock Market Summary Questions Notes Chapter 11 The Personality of a Successful Investor Big Five Personality Traits and Financial Decisions Big Five Personality Traits Big Five Personality Traits and Neural Activity Big Five Personality Traits and Experimental Risk Taking Big Five Personality Traits and Experimental Investments Big Five Personality Traits and Investments Big Five Personality Traits and Corporate Finance Big Five Personality Traits and Personal Finances The Dark Triad and Financial Decisions The Dark Triad The Dark Triad and Business The Underlying Conditions of the Dark Triad The Dark Triad and Financial Decisions Noncognitive Abilities and Financial Decisions Noncognitive Abilities Noncognitive Abilities and Business Overconfidence, Optimism, and Financial Decisions Noncognitive Abilities and Financial Decisions Summary Questions Notes Chapter 12 Types of Intelligence and Investment Performance Types of Cognitive Processing Cognitive Processing and Investing IQ and Investing Decisions Analytical versus Intuitive Thinking and Investing Decisions Measuring Analytical and Intuitive Tendencies—Cognitive Reflection Cognitive Reflection and Behavioral Biases The Theory of Mind and Investing Decisions How Each Type of Intelligence Impacts Investing Decisions Summary Questions Notes Chapter 13 Impaired Cognitive Function and Diminished Decision Making Aging and Cognitive Ability Decision Processing and Aging Aging and Financial Literacy Financial Knowledge Seeking Financial Advice Credit Choices Aging and Financial Fraud Cognitive Aging and Financial Fraud Investment Decisions of Seniors Aging and Financial Risk Aversion Aging and Portfolio Construction and Performance Aging and Behavioral Biases Improving Decisions of Older Adults Use It or Lose It Summary Questions Notes Index

John R. Nofsinger, Ph.D., is the William H. Seward Chair in International Finance at the University of Alaska Anchorage and is a portfolio manager at Denali Advisors, LLC. Corey A. Shank, Ph.D. is an Assistant Professor of Finance at Dalton State College.