Risky Business: Is Our Personal Appetite for Risk Wired into Our DNA?

Written by Rita Silvan

What's your appetite for risk? For some, it's ordering the chef's tasting menu; for others it's going off-grid in northern Mongolia. "You say potato; I say potahto," as the song goes.

An international group of researchers, including from the University of Toronto, has found a link between our DNA and our willingness to take risks. Yes, that's right, you can blame your parents! (Well, sort of.)

Humans share 99 per cent of the same DNA; it's that elusive 1 per cent that creates differences in eye and hair colour, as well as our unique predispositions to certain illnesses and, even, our inclination toward risky behaviours.

According to the study, there are 124 genetic variants that influence behaviours such as drinking, smoking, speeding and taking financial risks. Yet, our DNA only predisposes us to certain attitudes and behaviours, it doesn't predict them, say the researchers. Differences in risk tolerance could be influenced by thousands or, possibly, millions of genetic variations. That gives us a lot of wiggle room to learn to handle risk better.

To be forewarned is to be forearmed — here are some common behavioural risks when it comes to investing and how to avoid them:

1. Optimism

Looking on the bright side is a positive trait, but being overly optimistic is a risk factor as an investor. When considering an investment, it's tempting to focus on how well things could go without giving equal weight to the probability of the opposite outcome. This could lead us to jump on the bandwagon and risk overpaying for assets due to the fear of missing out. There is no sure thing in investing, which is why many investors opt to spread their risk by diversifying their investments.

2. Overconfidence

Confidence is a good thing — but so is competence. Believing that you have a special knack for picking winners or timing the market can lead to financial trouble or irrational decisions, or perhaps costly transaction fees from frequent trading. Enhance your competence instead; consider taking courses or joining an investor community. Read more in Why Overconfidence Can Hurt Investors.

3. Impatience

The father of value investing, Benjamin Graham, famously said: "In the short run, the market is a voting machine, but in the long run, it is a weighing machine." Stock prices are fickle, and a company's true value may only be reflected in its market price after a period of time. Who knows how long? Being impatient, by trying to get rich quick or attempting to time markets, could negate the powerful engine of compounding wealth over the long term.

4. Vagueness

Saving and investing can mean postponing spending money now to, ideally, have more to enjoy later. But, when we're unclear why we're investing, the temptation to spend today or to take unnecessary financial risks may be much stronger. Vague investment goals can lead to vague outcomes. To clear the fog, create a personal investment plan that includes your medium- and long-term goals, with accompanying dollar amounts. But don't worry, goals don't have to be set it stone. Life happens, and your goals can shift along with your circumstances.