Younger siblings tend to be risk takers who underperform – study

Birth orders will always have its stereotypes, but new research on has recently surfaced in the field of investment behaviour and found “economically meaningful” results.

In a research paper published on August 10, Vikas Agarwal from Georgia State University and Alexander Cochardt and Vitaly Orlov from the University of St. Gallen explained that younger siblings tend to take on more risks – and will likely underperform in the process.

The sample set looks into 1,905 managers operating 2,122 funds between 1962 and 2017. Of that sample, 40% of the managers were first-born, 34% were second-born, 15% were third-born, and the remainder were fourth- or later-born.

Studying solo-managed, domestic equity-only US mutual funds with total net assets of over US$1 million, the researchers concluded that funds owned by later-born managers are recorded to have 0.84% more total risk and 1.13% more active risk than their first-born counterparts.

“The later a manager is born in the sibling hierarchy, the higher is the propensity to take risks. This holders for total fund risk, idiosyncratic risk, and active risk,” Agarwal, Cochardt, and Orlov wrote. “Our empirical findings are consistent with the broad implications of evolutionary theory in psychology, which emphasizes the role of limited parental resources, specifically wealth and attention, in contributing to the sibling rivalry and influencing the development of risk attitudes.”

Researchers said later-born managers are most likely to choose “lottery stocks” out of the group – those with “low-price, high idiosyncratic volatility, and high idiosyncratic skewness.” They have also been identified to pay for most fines from civil violations and customer disputes on their FINRA BrokerCheck records.

However, this doesn’t mean that all younger siblings are doomed: the wider the age gap, the less significant birth order becomes in determining risk and success. In the same way, the more sibling rivalry is present during childhood, the more birth order-related behaviours become ingrained.

“Taken together, our findings suggest that birth order-induced, sensation-seeking tendencies originate from sibling rivalry for limited parental resources during childhood, shape trading behavior, and extend beyond portfolio management,” Agarwal, Cochardt, and Orlov wrote.