The Fetal Origins Hypothesis in Finance : Prenatal Environment and Investor Behavior ∗

We find that differences in an individual’s prenatal environment explain heterogeneity in financial decisions much later in life. An exogenous increase in exposure to prenatal testosterone, the most potent sex hormone in humans, leads to the masculinization of financial behavior, in form of elevated risk taking and trading in adulthood. We also examine birth weight, the most widely used summary measure of the early life environment. Those with higher birth weight are more likely to participate in the stock market, while those with lower birth weight prefer portfolios with higher volatility and skewness, consistent with compensatory behavior. This study is one of the first attempts to incorporate into finance research the notion that prenatal environment programs a fetus in the womb to have persistent behavioral characteristics. Our results contribute to the understanding of how environmental conditions and circumstances shape individuals’ behavior in financial markets. ∗An earlier version of this paper was circulated as “Prenatal Exposure to Testosterone Reduces the Gender Gap in Financial Risk Taking. ” We are thankful for comments from two anonymous referees as well as from seminar participants at Boulder Summer Conference on Consumer Financial Decision Making, Caltech, Claremont Graduate University, Claremont McKenna College, College of William & Mary, European Finance Association, Georgia State University, German Finance Association, Helsinki Finance Summit, Michigan State University Federal Credit Union Conference on Financial Institutions and Investments, Rice University, Santa Clara University, Simon Fraser University, TAU Finance Conference, Tsinghua Finance Workshop, University of Calgary, University of Toronto, University of Washington, University of Western Ontario, and discussions with Julie Agnew, Brad Barber, Colin Camerer, Paul Pengjie Gao, David Hirshleifer, Zoran Ivković, Samuli Knüpfer, Lisa Kramer, Si Li, Manjari Quintanar-Solares, Antonio Rangel, Elias Rantapuska, Hirsh Shefrin, Meir Statman, Christoph Sorhage, and Paul Zak. We thank Feng Cheng, Florian Münkel, Lucas Perin, Lew Thorson, and Nancy Yao for excellent research assistance, Jack Goldberg (Twin Registry at University of Washington) and Nancy Segal (Twin Studies Center at California State University, Fullerton) for advice related to twins studies, and John K. Amory (General Internal Medicine, University of Washington) for discussions about the effects of prenatal testosterone. The Swedish Twin Registry (STR) and Statistics Sweden provided the data for this study. STR is supported by grants from the Swedish Research Council, the Ministry of Higher Education, AstraZeneca, and the National Institute of Health (grants AG08724, DK066134, and CA085739). Any errors or omissions are our own. †Cronqvist: China Europe International Business School (hcronqvist@ceibs.edu); Previtero: University of Western Ontario, Richard Ivey Business School (aprevitero@ivey.uwo.ca); Siegel: University of Washington, Michael G. Foster School of Business (ss1110@uw.edu); White: University of Western Ontario, Richard Ivey Business School (rewhite@ivey.uwo.ca).