Children with at least one parent holding a high school diploma are much less likely to be risk-averse than those whose parents have less formal education, researchers found in studying survey data from nearly 3,400 adults.
The development of risk aversion among children has an effect on the financial choices they make as adults, said Maria José Luengo-Prado, an assistant professor of economics at Northeastern University in Boston and one of the co-authors of the study.
Seventy-six percent of the survey respondents 17 to 70 had at least one parent with at least a high school diploma. Of this group, 27.78% of respondents reported the highest level of risk aversion on a scale of six categories. This increased significantly if neither of a respondent's parents finished high school, with 43.86% in that group reporting the highest level of risk aversion.
"You learn to mimic your parents' behavior," said Ms. Luengo-Prado. "Even with a little bit of education, the tendency for their children to be very risk-averse can be eliminated altogether."
Tolerance for risk can make a big difference in someone's financial future, said Brian Jones, vice president of CJM Wealth Advisers Ltd., a Fairfax, Va., firm with more than $400 million in assets under management.
"If you have a 22-year-old graduating from college and getting a job with a 401(k), they are already 15 to 20 years ahead of Mom and Dad," he said. "If you can get them to tolerate more volatility and risk, they can make bigger gains. They are coming out of college and saying, 'I need to be in international holdings.' If they are more growth-oriented from Day One, they will run circles around their parents."
Whether or not the parents owned a business also had an impact on their children, according to the research, with children of entrepreneurial parents reporting much less risk aversion.
The data used came from the Panel Study of Income Dynamics, a longitudinal study of income, demographics and consumption conducted by the University of Michigan that began in 1968 by following some 4,800 households across 40 states. The survey also has followed the additional households created by the children of the original participants.
Risk aversion plays out in income volatility. "Those more likely to take chances have more salary fluctuations," said Ms. Luengo-Prado. "There is a 2% differential in the median deviation. This can translate into thousands of dollars on an annual basis."
Whether or not someone buys stocks is also affected. The re-searchers found that 34% of participants whose parents had no high school education owned stocks, compared with 47% of those who had at least one parent with a high school education.
Advisers agree that children should learn about finances at an early age.
The Monetta Funds' Young Investor Fund (MYIFX) has kits designed for children as young as two.
The Wheaton, Ill.-based fund is one of only a handful aimed at children. Half of the fund is invested in ETFs, and the other is invested in "kid-themed" stocks such as The Walt Disney Co., Google Inc., McDonald's Corp. and Coca-Cola Co.
"One of the things that's critical to getting kids involved is getting them to feel ownership," said Bob Bacarella, president and portfolio manager of the Monetta Funds, which has $80 million in assets.
Games on the firm's website teach about investing, with e-mails that teach how the stock market works. It isn't about trading, Mr. Bacarella said.
Players pick stocks but have to keep the same portfolio for six weeks.
At some point, advisers become educators.
Despite the parents' level of education, peer pressure can make it hard for parents to say no to an expensive college, said Fred Amrein, president of Wynnewood, Pa.-based Amrein Financial, which has part of its business focused on college planning.
"Parents need to teach financial responsibility," he said.
"They are having a conversation with their 18-year-old about a $200,000 or more investment," Mr. Amrein said. "They need to look at where the child is going to go at age 25."
The belief that varying age groups respond to different material led Mr. Jones to write a book with Generations X and Y in mind, publishing "Getting Started: The Financial Guide for a Younger Generation" (Larstan Business Reports, 2006).
From a competitive perspective, it's also important to work with the kids. "If you don't get in front of the kids when Mom and Dad are still living, those dollars will leave," Mr. Jones said.
Dmytro Hryshko, assistant professor of economics at the University of Alberta in Edmonton, and Bent E. Sorensen, professor of economics at the University of Houston, are co-authors of the risk-aversion study, which Ms. Luengo-Prado will present to a study group at the Federal Reserve Bank of Boston next month.
Sue Asci can be reached at firstname.lastname@example.org.