Savings, Genes, and Fade-Out
By Bryan Caplan
Parenting often has large effects on the young. Parents do stuff, their kids respond, and observers conclude that parenting is very important. You need twin and adoption methods to uncover the crucial caveat: these parenting effects usually fade-out. Kids aren’t like clay that parents mold for life; they’re like flexible plastic than responds to pressure but returns to its original shape when the pressure is released.
Latest example: savings behavior. Cronqvist and Siegel’s “The Origin of Savings Behavior” compares identical and fraternal Swedish twins to measure the relative effects of nature and nurture over the life cycle. Parenting has a big effect on savings behavior in your twenties, but rapidly vanishes:
[P]arenting explains about 40 to 50 percent of the variation in savings rates for the youngest individuals in our sample (20-25 year olds), but this effect decays significantly and attains zero by middle age. That is, while parents seem to strongly affect their children’s savings behavior early on in life, the effect disappears over time as their children gain their own individual-specific life experiences.
Our interpretation of this evidence is that social transmission from parents to their children affects children’s savings behavior early on in life, but unlike genetic effects, parenting does not have a lifelong impact on an individual’s savings behavior. These results are broadly consistent with research in behavioral genetics which has found a significant effect of the common family environment in early ages on, e.g., personality, but also shown that such effects approach zero in adulthood…
You might think that, due to the magic of compounding, parents’ strong effect on early savings would translate into a strong effect on retirement wealth. Not so:
We find that about 39 percent of the cross-sectional variation in wealth accumulated up to retirement is explained by genes. The effect of the common family environment and upbringing, which by model construction also reflects wealth inherited from parents, explain seven percent of the cross-sectional variation.
What’s the underlying mechanism? Cronqvist and Siegel’s other results point to lasting nature effects – and transient nurture effects – on time preference, patience, and/or self-control:
We find a significantly positive correlation between an individual’s savings rate and income growth, consistent with the common prediction that patient individuals experience higher income growth. Importantly, for a subset of individuals, data on education (number of years), smoking (number of cigarettes smoked per day), and body mass index (BMI) (weight relative to squared height) are available from the STR’s interviews. We find no statistically significant correlation between education and savings behavior, but… those who save less are found to smoke more and are more likely to be obese…
As usual, neither nature nor nurture come close to a full explanation of savings, income growth, smoking, or obesity. The effect of “non-shared environment” – also known as “none of the above” – is massive. If free will is a key determinant of economic success, this is precisely what we should expect.
HT: Rob Wiblin