The Fetal Origins Hypothesis in Finance: Prenatal Environment, the Gender Gap, and Investor Behavior


We find that differences in individuals’ prenatal environment explain heterogeneity in financial decisions later in life. An exogenous increase in exposure to prenatal testosterone is associated with the masculinization of financial behavior, specifically with elevated risk taking and trading in adulthood. We also examine birth weight. Those with higher birth weight are more likely to participate in the stock market, whereas those with lower birth weight tend to prefer portfolios with higher volatility and skewness, consistent with compensatory behavior. Our results contribute to the understanding of how the prenatal environment shapes an individual’s behavior in financial markets later in life.

Alpha Highlight:

Disclaimer up front: This paper is a little “out there,” but thinking outside the box is healthy for the mind…

It is now recognized in academic research that early childhood experiences may affect a person’s financial behavior later in life. For example, Malmendier and Nagel (2011) find that “depression babies” who were born during the depression era are more risk averse in later life. Chetty, Friedman, et al. (2011) show that one’s kindergarten experiences are highly correlated with later outcomes, such as earnings, college attendance, home ownership, and retirement saving. However, few people are aware that the prenatal environment may also have a long-term impact on later life. Recent research by Cronqvist, Previtero et al. (2015) examines the relationship between the prenatal environment and subsequent investor behavior. The authors study two factors and how they affect financial decisions: infant testosterone levels and birth weight. 

Main Findings:

In the study, the authors show that infant testosterone levels may affect a person’s behaviors later in life. Testosterone is one of the most potent hormones and plays an important role in human brain development. Prenatal exposure to high levels of testosterone has a substantial influence on gender-related behavior. As is now understood, males generate much higher levels of testosterone than do females. This also happens to be true while they are still in their mothers’ wombs. Testosterone can also influence a baby’s facial appearance; for example, high levels of prenatal testosterone can influence morphological features on the face, such as by creating a wider jaw and a shorter forehead, leading to more “masculine” boys.

  • Testosterone:

The authors chose data from 34,460 twins as a study sample; most of these babies were born in the 1940s. The reason they used twins as a sample is that the prenatal testosterone contributed by the male fetus increases the testosterone exposure of the female fetus who shares the womb. This is known as “Twin Testosterone Transfer” (TTT). So the female fetus who share the womb with a male fetus can be more “masculine.” The paper shows that a female with a male co-twin takes significantly more risk later in life compared with a female with a dizygotic female co-twin. Specifically, a female with a male co-twin allocates about 1.24% more to stocks compared with the latter. The paper concludes that an exogenous increase in exposure to prenatal testosterone leads to higher risk-taking, more trading, and more investments in lottery-type assets.

  • Birth Weight:

A baby’s birth weight is affected by many factors: a mother’s age, health, nutrition in utero and so on. Birth weight is a common proxy for the prenatal environment. Currie and Hyson (1999) find that the birth weight of an individual is related to future outcomes such as education and earnings. The paper shows that a baby with a lower birth weight invests less in the stock market, but holds portfolios with higher volatility and skewness. Perhaps individuals with lower birth weights attempt to compensate for lagging behind at birth (Robson, 2001). Additionally, individuals who experience poor nutrition in utero (starved babies) are more likely to become overweight as adults (Barker, 1995).


Credit to Arturo J. Panlagua, nina mala


When it comes to understanding financial decision making the discussion typically revolves around experience, knowledge, and judgement. This paper highlights that elements out of our control may actually contribute to our decision-making processes.

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