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Risk Takers Follow in Parents' Dangerous Footsteps
Would you choose a guaranteed $100 or a 20 percent chance of $1000? What if the odds went up to 40 percent?
Whatever your answer, your mother would likely agree.
New research shows parents and children have similar attitudes toward risk-taking in matters of finance, careers, health and even driving.
"With 1 being a perfect match, the correlation is about 0.3," said co-author David Huffman, a senior research associate at the Institute for the Study of Labor in Bonn, Germany. "So it's not deterministic—lots of other things matter beside parents—but it's certainly not trivial."
Wealth of ideas
The data comes from a survey of 3,600 subjects and their parents, in which the participants rated their willingness to take risks in a variety of situations. The results are outlined in a discussion paper now awaiting publication.
The data seemed to show they did. In a question about the percentage of lottery winnings subjects would be willing to invest in a risky but potentially lucrative venture, the authors found that for every 1,000 euros the parent invested, the child's investment increased by 250.
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He added though that it's unclear whether willingness to take certain risks leads to wealth or if wealthy people simply have more freedom to take financial gambles and reap the benefits.
Irrational exuberance
The study reflects a growing scientific interest in how people make financial decisions and why those decisions are not always rational, as economists had once assumed they were.
A study published last year in the journal Neuron shed light on the issue by identifying two pathways in the brain that play a role in financial risk taking: One inhibits risky behavior by triggering a fear response and another encourages it by activating a reward response. Making financial decisions that involve risk requires a balancing act between the two.
It pays to fall somewhere in the middle, willing to take risks but not to a fault, said the Neuron study's co-author Camelia Kuhnen, an assistant professor of finance at Northwestern University.
"When you have too high activation in the nucleus accumbens, so you're too risk-seeking, on average you lose," Kuhnen explained. "And the same thing with the anterior insula, if you're too risk-averse, you'll stay with a bond too long and lose potential gains."
"Knowing if you inherit genetically the preferences of your parent or you learn them is important for the economist, because if it's about learning, then they can change over time," Kuhnen told LiveScience.
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