Your genes help determine how much money you save

A Winklevoss  huddle.
A Winklevoss huddle.
Image: AP Photo/Craig Ruttle
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Economists have long theorized about why people save. The most-famous theory, the so-called “life-cycle” theory of savings put forward by Nobel Prize-winning economist Franco Modigliani in the 1950s, said—to put it crudely—that people save when they’re young to finance their lives when they’re old. It sounded reasonable. And it was hugely influential for decades.

And it was wrong. “Exhaustive attempts to explain actual saving patterns with Modigliani’s basic life-cycle hypothesis proved entirely unsuccessful,” said a paper surveying the history of economic thinking about saving, published by the Federal Reserve Bank of Minneapolis in 2003.

In the 1970s, a different model, sometimes known as the dynastic model, emerged, theorizing that savings are not just about financing old age, but also about leaving an inheritance for one’s kids. Once again, that’s certainly true in many instances, so it seems to have some intuitive power. But like the life-cycle theory, it didn’t match up well to the real world. For instance, it had trouble explaining the extreme levels of accumulation among wealthy people, that matched actual levels of inequality in the US.

Now, there’s a new attempt to explain the human propensity to squirrel away savings, this one coming from biology instead of economic science. That behavior might be genetic, at least in part. A new paper published in the Journal of Political Economy connects data from the Swedish Twin Registry, a repository of information on fraternal and identical twins, to individual wealth data that the Swedish Tax Agency makes available to researchers.

Researchers Henrik Cronqvist and Stephan Siegel constructed a measure of savings by essentially tracking the changes in the net worth of the twins between 2003 and the end of 2007. They found that identical twins—who share the exact same genes—are significantly more similar in their savings behavior than fraternal twins. In fact, they conclude that genetic differences explained roughly 33% of the variations in individual savings rates.”We and many other financial mainstream economists had just not thought about it,” Siegel says of the paper’s findings. “Because it’s slightly outside the mainstream way we think of human behavior in terms of finance and economics.”

It might not be outside the mainstream for long. Increasingly, economists are beginning to dip their toes into the field of genetics. For instance, a paper published in the Journal of Finance in 2010 found that genetics accounted for roughly 25% of the individual variation in risk-taking seen in financial portfolios. And the the emerging field even has its own portmanteau: Genoeconomics.