# The Biology of Investing Author: ## Review This is a survey of research on the biological factors that influence financial decision making. It's broken down into three main sections: genetics, physiology, cognition. Each section is divided into further topics and summarizes the empirical evidence linking the relevant biological factor to decision making. The characteristics of decision that are most commonly evaluated are risk preferences (aversion and seeking), behavioural biases (such as loss aversion) and performance (such as probabilistic reasoning tasks). Genetics drives around one-fifth to one-third of behavior and economic outcomes. This decreases over time and the adult experiences of an individual dominate decision making. Home environment marginally influences the behaviour of young people. There are specific groups of genes (polygenic scores) that can be related to improvements in probabilistic thinking and risk aversion. Differences in neurotransmitter receptors and processes are important genetic factors. Biological sex also plays a role in risk aversion likely via testosterone although risk appetite is relative to who is in your environment, e.g. an all-girls settings can be just as risk seeking as boys in a mixed environment. There is a complex interplay between cortisol and testosterone. The relative levels between this two matters just as much, if not more than the absolute levels of each. Sleep is a critical factor for being rational, and stimulants cannot reverse the effect of being sleep deprived. Physical health and diet are important and strongly linked to performance and risk preferences at a personal level and group level. Companies in areas with more obesity perform worse and unhealthy individuals perform worse. However, its not clear how much of it is because of poor health or because poor health is an indicator of negative characteristics (lack of impulse control and rational thinking). Emotion regulation is also an important factor in reducing susceptibility to behavioural biases, and irrational decisions. Personality traits also impact decision making. Extroversion is positively related to risk taking and neuroticism is negatively related to risk taking. Psychopaths are more common in business and can often make more rational decisions but are also linked to unethical and risky behaviour. The intelligence factors are (unsurprisingly) the most important. High IQ, high scores in theory of mind tests and cognitive reflection tests are predictive of performance in decision making. Cognitive abilities decline with age, but are offset by experience up to a certain point. Mistakes in financial decisions are minimized around the late 40s. This is aligned with other research (not covered in this book) that investment manager performance peaks in the late 30s to early 40s. From my perspective there was nothing tremendously surprising. Unfortunately there was no direct discussion on what an individual can do to improve decision making. This could have made for a great section at the end. Here are some of the things that imply better decision making: optimal BMI, better diet, regular high quality sleep, no stimulants (including coffee), staying cognitively engaged to delay declines in cognitive abilities, increase fluid intelligence, improve theory of mind, using analytical (vs intuitive) thinking, regulate emotions, don't get old... ## Key Ideas ## Related