Canadian Investment Review

How much do early childhood experiences matter?

Written by Yaelle Gang on Monday, June 3rd, 2019 at 8:21 am

Young child with brain illustrated © Sergey Nivens /123RF Stock PhotosDo a chief executive officer’s experiences as a child affect their company’s profitability? And do a fund manager’s early childhood experiences influence financial decision-making later in life?

Recently, two separate working papers explored the impacts of early childhood circumstances on a firm’s profitability and a fund manager’s risk taking.

A paper authored by the University of Chicago’s M. Todd Henderson and Florida State University’s Irena Hutton found firstborn CEOs, CEOs from families with higher socioeconomic resources and those with less childhood trauma prefer safer investment and leverage policies, leading to lower firm value. Of these three options, the paper found the effect of socioeconomic status was the strongest.

The researchers used publicly available documents and scraped news stories and CEO’s biographies to code the information.

“We started out thinking mostly about birth order and then, as we dug into the CEO biographies and such, we realized we could mine a lot more of the richness of the data set we were building,” says Henderson. “So we included socioeconomic status and family trauma and parents, jobs and things like that and that’s how the project got started.”

These findings can be relevant for board members who are choosing CEOs, he notes. “In addition to, ‘Where did you go to college? What did you study? What’s your work experience been?’ boards should ask questions like, ‘What did your mom or dad do for work? Were you rich or poor as a kid? Tell me your family history?’”

There could be different views to explain this, says Henderson. On one hand, someone who grew up well off may feel more comfortable taking risks because they have something to fall back on. Yet, on the other hand, someone who grew up better off may not have the same grit to work hard to afford a secure lifestyle as someone who had less money in their childhood.

The paper found evidence that the latter description is more likely than the former, he adds. “. . . When things are handed to you, you don’t have to work as hard. You don’t have to scrap. And I think a lot of being a risk-taking CEO is being scrappy and putting in the extra effort, and that extra effort is something that people are motivated to do amazingly based on things that happened to them five decades ago.”

Another working paper, by André Betzer and Henrik Schürmann from the University of Wuppertal’s Schumpeter School of Business and Economics, Peter Limbach from the University of Cologne and Centre for Financial Research and P. Raghavendra Rau from the University of Cambridge, explored how early family disruption influences risk-taking behaviour.

The paper used publicly available data to paint a picture of fund managers, looking at whether their parents died or divorced and then measured this against risk-taking.

Indeed, it found that those who experienced a death or divorce in early childhood take lower idiosyncratic, systematic and downside risk. More specifically, the paper found the effect is most pronounced for managers who experienced family disruption during their formative years and in cases of parental deaths when the surviving parent either had no new partner or had little social support.

People tend to assume human beings have tendencies trained out of them, so professional money managers shouldn’t be strongly affected by personal characteristics, says Rau. “I think the big takeaway from our paper is that that’s not true. . . . If you look at the medical literature, if you look at the neuroscience literature, it turns out that when you’re growing up and you have a traumatic experience, it actually physically affects parts of your brain.”

In addition to physical brain changes, there’s also literature in psychology showing that, if someone loses their parents, they lose their most important secure base, and this matters when someone grows up and learns to take risk. “A very intuitive theory behind what we are doing is, if you lose your secure base early in your life, you find it harder to learn [to] take risks and to take risks, be wrong and get the courage to go on,” says Limbach. “So besides this medical factor, I think there’s also a psychological factor that explains our results.”

Read CEO Traits and Firm Outcomes: Do Early Childhood Experiences Matter?:

Read Till death (or divorce) do us part: Early-life family disruption and fund manager behavior:


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