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This is one inheritance you don't want

You're at risk of making the same financial mistake as your parents

Suzanne Woolley | Bloomberg 

Debt, Loan
If a parent was in default on a loan at the end of the year, the chance of default for their children was more than four times as high as for those whose parents were model financial citizens, a study has found. Photo: Bloomberg

You may have received a big inheritance, even if you’re not aware of it: How you handle your money.

Economics professors at the University of Copenhagen have found that if a parent was in default on a at the end of the year (their study looked at data from 2004 to 2011), the chance of default for their children was more than four times as high as for those whose parents were model financial citizens. And that’s across all levels of parental income, balances and other measures, including that of intelligence.

The study analysed about 30 million personal held by some five million Danes aged 18 to 45. It linked that information to government data, including income level and education for the borrowers and their parents.

The key finding: The share of 30-year-olds in financial trouble — narrowly defined in this study as being at least 60 days late on a at the end of the year — was five per cent among those whose parents showed no similar sign of financial trouble. It was 23 per cent for kids whose parents’ records showed financial trouble. 

The study follows other research concluding that risk attitudes (PDF) seem to be handed down by generation. It couldn’t rule out the chance that long-lasting health shocks had an effect on income that carried over to the next generation, but it did find evidence that shared common shocks tied to the business cycle, such as a parent and child unemployed at the same time, weren’t likely causes for the correlation.

An earlier study that lends support to the Copenhagen work found that adoptees with parents who take on more investment risk in their portfolios tend to make financial decisions for their own portfolios that reflect similar levels of risk. It concluded that nurture plays a substantially larger role than nature in financial risk-taking among parents and children.

That’s not to say our hard wiring plays no role. A 2015 study of identical and fraternal twins in Sweden concluded that “genetic differences explain about 33 per cent of the variation in savings propensities across individuals”, finding that parenting plays a part in the differences in the twins’ savings behaviour early on but that the effect waned over time. The researchers used different methods from those of the Copenhagen professors.

The Copenhagen authors also found that for the same interest rate, the default incidence was substantially higher for those whose parents were in default than for those whose parents weren’t. with an interest rate of five per cent had a probability of default within the next seven years of 0.5 per cent if a parent wasn’t in default in 2004, but the probability rose to 1.75 per cent if a parent was, the authors write. 

That means that “individuals with parents who are not in default on average pay an interest rate penalty to cover the losses incurred by individuals who default because they have adopted the financial behaviour of their parents”, the study found. That’s because the two types of borrowers pay the same rate, all else being equal.

© Bloomberg

First Published: Sun, July 16 2017. 22:39 IST