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Nature and nurture

Childhood disruption through parents’ divorce or death is a “nurture”-related factor affecting risk taking of investment professionals, says study in Journal of Banking & Finance.

Father with toddler daughter sitting on his lap, both smiling.
Professor Raghavendra Rau

It’s long been accepted that both nature and nurture influence the risk-taking threshold of professional investors. A just-published study identifies early-life family disruption in the form of death or divorce of parents during childhood as one of those nurture-related factors.

The study in the Journal of Banking and Finance, co-authored by Professor Raghu Rau, Sir Evelyn de Rothschild Professor of Finance at Cambridge Judge Business School, says people who experience such events in childhood take lower risk and are more likely to sell their holdings following risk-increasing events affecting companies.

The paper also found a higher “dispositional effect” – greater propensity to sell stocks when they are at a gain than when they are at a loss – among fund managers who experienced such disruptive events in childhood. The authors conclude that those who had such events in childhood may be “more vulnerable to future loss” and “more likely to avoid the realisation of losses in their portfolios and realise gains more quickly.”

The study’s results suggest, further, that family stability or instability, rather than specific features of the family environment, “consistently relates to investment behaviour later in life.”

The study is based on 484 fund managers for US-based funds between 1980 and 2017, using federal and state records as the key source for information on death and divorce in investment professionals’ families.

The study – entitled “Till death (or divorce) do us part: early-life family disruption and investment behavior” – is co-authored by Professor André Betzer of BUW-Schumpeter School of Business and Economics, Dr Peter Limbach of University of Cologne; Professor Raghavendra Rau of Cambridge Judge Business School; and Henrik Schürmann of BUW-Schumpeter School of Business and Economics.