1st Edition

The Biology of Investing

By John R. Nofsinger, Corey A. Shank Copyright 2020
    232 Pages 40 B/W Illustrations
    by Routledge

    232 Pages 40 B/W Illustrations
    by Routledge

    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

    Biography

    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.