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06 May 2014

How our Family Background Conditions our Perception of Risk

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The importance we place on the risks we take differs from person to person. What motivates our having different values? The Word Values Survey Association classifies people along two axis: the religious one and the survival one. The Cultural Theory of Risk, classifies us in four categories along the Grid and Group axes: “Hierarchicals”, Individualists, Egalitarians, and Fatalists.

One’s social situation, sex, and race are conditioning factors in our vision of reality. The White Male Effect is a well-known phenomenon explaining the differing sensibility toward risk or determined risks presented by the typical “while male”, compared to the contrasting attitudes toward risk presented by the feminine gender or ethnic minorities. In fact, this effect has been used to explain and predict the winners of the Cinema Academy Awards Oscars… a matter to which we’ll return in a future post.

If we are products of our religion, social situation, sex, and even the color of our skin, then we should even more so be products of our parents, shouldn’t we?

Thomas Dohmen (2006, Dohmen et al.) presented a study called “The Intergenerational Transmission of Risk and Trust Attitudes” (available Here), based on the analysis of a large-scale survey conducted in Germany. Before going over the conclusions, it might be worth taking a moment to reflect upon three ideas that arise in the aforementioned article:

  1. Confidence is not the same as the Tolerance of Risk. Confidence is an Attitude that rests on the concepts of confidence-dependency (Reliance) and caution-wariness. (Caution). Confidence has dimensions that the propensity to risk-taking lacks, such as the perception that others are “trustworthy”.
  2. Transmission mechanisms from parents to children are independent for confidence and risk-taking. In fact, there are differences in how and how much both qualities are transmitted based on whether the father or the mother is doing the transmitting. This demonstrates that the education component is differentiated, and children have different perceptions and attitudes based on which parent has a greater influence.
  3. There is a positive correlation between parents in the predisposition to confidence. The study does not delve deeper into this aspect, but it does lead one to think that, in the process of looking for a partner, sharing the same attitude with respect to confidence is a favorable factor.

The main conclusions of the article are:

  1. Propensity to risk-taking among children is a faithful reflection of their parents’ own. The effect is accentuated in families with fewer children and in first-borns.
  2. Attitude before risk is transmitted differently than confidence. It doesn’t depend on the size of the family or the order of being born.
  3. The authors enumerate three possible transmission channels: genetic influence, learning by imitation, and parents’ efforts to shape the attitudes and thinking of their children to resemble their own.
  4. The role of the mother tends to be more relevant: there is a greater correlation between mothers and children than between fathers and children, both in propensity to risk-taking and confidence.
  5. Daughters tend to be more adverse to risk than sons, although in general sons and daughters have the same predisposition to risk-taking that their parents.

The case of single-parent or same-sex parents families is excluded from the scope of this study, or at least it is not made explicit.

At least in my case, reflections do not lead one toward family structure and the relationships maintained by the different members of the family. The most relevant is to understand that confidence and the propensity to risk-taking are separate concepts, with different dimensions, and transmitted independently, although positively, from parents to children.

Is confidence therefore a characteristic of individual geographical cultures? To get back into the financial arena, we can deduce that propensity to risk-taking is a “hereditary” component reflecting paternal and maternal predisposition, and therefore, cultural. If this is the case, average incomes, volatilities, and, in short, the potential growth of a country, region, or town with a common identity will depend, to a greater or lesser degree, to this cultural heritage.

Pedro Agudo

Economist, BBVA, Madrid (Spain)

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