Nature Vs. Nurture: What Influences How We Spend?

Is the way we spend and save predetermined by genetics, or is it a byproduct of our upbringing and surroundings?

According to Dr. Hersh Shefrin, behavioral economist and professor of finance at the Santa Clara University’s Leavey School of Business, it’s not an either-or proposition.

That’s one of the key findings in Shefrin’s new white paper, “Born to Spend: How Nature and Nurture Impact Spending and Borrowing Habits.” The paper takes a look at how genes, nurturing and education influence financial habits, and how we can help to correct improper spending in those who are predisposed to or who have learned to make financial mistakes spoke with Shefrin to discuss the findings of his paper, learn who he believes should be responsible for improving financial education and more.

“I became interested in particular in the way that people make spending decisions and savings decisions, and economics literature seemed to be suggesting from a data perspective that people weren’t saving enough,” Shefrin said. “And that got me interested in looking at, what are the psychological issues that economists might be missing.”

And what has Shefrin found? Weighing in on the “nature” side of the debate is the study’s note that gene variance and dopamine flow can all impact how a person makes financial decisions.

“If you have one variance of this gene you’re more inclined to be better at learning and more inclined to be better at financial decision making than if you have a different variance of this gene,” Shefrin explained. “So nature is definitely an important issue.”

That’s not to say that nurturing doesn’t play an important role as well. Shefrin notes that parenting can have a big impact on a person’s financial decision-making, albeit one that lessens over time as opposed to more permanent genetic components.

“Nurturing does exert an influence; parenting is especially important. But the impact of parenting is different from the impact of nature. So if your parents have good spending and borrowing habits, they can transmit to those when you’re young, but the impact decays over time,” Shefrin explained. “The nature part, the genetic part, that’s constant through your whole life. But the nurturing part is temporary. That doesn’t mean that it only exists for a short time horizon but it definitely sort of declines over time.”

So given the complex nature of human financial decision making, how can people learn to make better financial choices? Shefrin says several outlets, such as parents, schools and the media should play a part in education, but emphasizes that financial institutions have the ability to make dramatic leaps in this area, too.

“Technology is going to be playing an incredibly important role going forward because financial institutions will be able to provide consumers with their consumer data in a way that is easy to understand,” he said. “Financial institutions, by using apps, clever apps, well-designed apps, and building those apps on top of the consumers’ own data, will be able to provide fairly easy ways for consumers to understand what their situation is and to understand the nature of the options and the costs and the benefits.

It’ll never be perfect because people aren’t perfect but it’s going to get a lot better going forward.”

To hear more of Shefrin’s thoughts and learn more about his findings, listen to the full podcast below. And to read his complete white paper, click here.


*If you have trouble with the audio player above, click here.

Dr. Hersh Shefrin
Mario L. Belotti Chair in the Department of Finance
Santa Clara University’s Leavey School of Business

Dr. Hersh Shefrin is the Mario L. Belotti Professor of Finance at Santa Clara University’s Leavey School of Business. Dr. Shefrin is one of the pioneers in the behavioral approach”¨to economics and finance. A 2003 article in the American Economic Review listed him as one of the top fifteen economic theorists to have influenced empirical work. In 2009, his behavioral finance book Beyond Greed and Fear was recognized by J.P. Morgan Chase”¨as one of the top ten books published since 2000. Among Dr. Shefrin’s other books are”¨A Behavioral Approach to Asset Pricing, Behavioral Corporate Finance, Ending the Management Illusion, and Behavioralizing Finance. Dr. Shefrin received his Ph.D. from the London School of Economics in 1974. He holds an honorary doctorate from the University of Oulu, Finland.

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