Joachim Klement: How Personal Experience Can Determine Risk Preferences

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Delegates at the Fifth Annual European Investment Conference were treated to a fascinating introduction to Joachim Klement’s views on how individual experiences affect risk preferences. As chief investment officer at Wellershoff & Partners Ltd., Klement has developed an incisive profile of this remarkable phenomenon.

He began his presentation by discussing the power of shared experiences. What Klement and his team have discovered is that people who experienced a recession between the ages of 18 and 25 are more likely than those who did not experience a recession to believe that government should reduce income inequalities. In addition, his team demonstrated that the greater one’s portfolio is allocated toward growth stocks, the greater one’s portfolio resembles the portfolios of those who attended the same university. Without asserting a specific hypothesis, he said it appears that we humans tend to self-organize into little herds of people.

In one particular study, Klement’s team examined the relationship between age cohorts and their memories of the 1970s inflation. Those born before 1926 — who had experienced the Great Depression — also had a greater likelihood of remembering the high-inflation era of the 1970s. Across all age cohorts, the influence of these memories waned materially after about 10 to 15 years. The implication, he emphasized, is that the recency effect can blind us to future risks for no other reason than we have not experienced the risks in a long time. This fact reveals the power of understanding financial history.

Klement completed his behavioural tour de force with a discussion of the genetic relationship between individuals’ risk preferences and their parents. In fact, scientists have even uncovered the risk-taking gene, which identifies the risk preferences of different people. In their studies, job choices tend to relate to the job choices of parents. Klement’s research is pretty compelling; entrepreneurs tend to be the children of risk-taking investors. Likewise, conservative investors tend to have conservative parents. It seems science keeps revealing more and more flaws in our decision making. The trick for investors is to recognise these flaws and endeavour to account for them in one’s portfolio management process.

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