For Some, Risk Taking May Be in the Blood

Seeking his fortune, H. L. Hunt, the late Texas oilman, left his home while still a teen-ager. Despite having little money and less formal education, Hunt became successful buying and selling cotton and plantations in Arkansas.

As he took bigger risks he also suffered greater losses, but he was able to make a comeback. He is said to have used poker winnings to buy oil leases in the 1930s, which he eventually built into an enormous empire that included oil and natural gas holdings, real estate, silver, horses and electronics.

Hunt’s three sons--Nelson Bunker, W. Herbert and Lamar--are now having financial troubles. Outdoing even their dad’s urge to speculate, the Hunt boys took massive losses when they tried, and failed, to corner the silver market a decade ago.

If the essence of these two generations of the Hunt family could be put under a microscope, it might help answer a question that has long bothered social scientists and investment professionals: Are people born with a desire to take big financial risks, or does the urge develop with experience?

Looked at in a different way, experts have long wondered whether the way people handle their money and their investments can be scientifically predicted. If investors could be categorized into convenient groups, investment professionals could save time and effort by hawking, say, speculative investments only to those who were likely to be receptive to taking risks.

One of the most intriguing studies of risk takers was conducted several years ago at the University of Arizona. Blood tests were done on 125 people who took part in a make-believe sealed-bid auction using real money. Van Harlow, who worked on the study and is now a vice president at Salomon Brothers, believes the bigger risk takers were those with low levels of an enzyme called mono-amine oxidase. “There seems to be a propensity for taking risks among people with lower levels of the enzyme,” says Harlow.

Marilyn MacGruder Barnewall, who heads a bank consulting firm in Cincinnati, believes that a person’s investment tendencies can also be determined by occupation.

She says corporate executives, lawyers from large regional firms, certified public accountants from major accountancy firms, non-surgical doctors and dentists, small-business owners who inherited their businesses and wealthy heirs tend to be conservative investors.

Among the risk takers: small-business owners who started their own businesses, independent CPAs, lawyers and surgeons.

Barnewall breaks investors into two groups: active self-investors and passive market investors. Passive investors have gained wealth from inheritance or by risking the capital of others (as a businessman working for a publicly held company would). Active self-investors risk their own capital.

“Passive investors have a higher need for security than they have tolerance for risk,” she says. But as passive investors gain wealth, they become more adventurous in their financial market investments, Barnewall says.

“Active self-investors have a very high tolerance for risk, so long as they totally control the risk being taken,” says Barnewall. That’s why, she says, active investors don’t like to invest in financial markets.

The study of investor types doesn’t end with simply finding out where they like to place their money. There have been psychological studies relating the willingness to take investment risk with a person’s self-esteem.

Michael Mumford, associate professor of psychology at George Mason University in Virginia, says high-risk takers usually think more highly of themselves. “Illustration--Donald Trump,” says Mumford. “They are deal makers.”

Stoking the Eternal Interest Rate Debate

Interest rates are likely to rise a little during May, but the experts generally believe that borrowing costs will then level off or perhaps even drop a bit during the latter part of 1990.

While that prediction isn’t exactly great news for the equities market, it could mean that stocks won’t come under additional pressure in the months ahead. At least there won’t be a whole lot more pressure from rising interest rates.

Stock prices have been dropping for the past few weeks because Wall Street is worried that generous bond yields will lure investors away from stocks. The rise in interest rates and the relatively small pullback in stock prices have a lot of Wall Street experts wondering if the stock market isn’t making the same mistake that it made in 1987 when it ignored warnings from the credit markets.

Irwin L. Kellner, chief economist of Manufacturers Hanover Trust, believes that in the next few weeks long-term bonds will have to rise from the current 8.9% rate. That’ll probably happen around the middle of May, when the U.S. Treasury is set to auction off its latest batch of 30-year bonds. “The general expectation is that the new (bonds) will have to go to 10%,” says Kellner.

Economists in general aren’t as certain of a rate hike as Kellner. According to the Blue Chip Economic Indicators, a survey of 51 economists, the prevailing view is that the best corporate bonds will be at 9.1% in the second quarter, down a fraction from levels reached in the first quarter.

“They think rates have peaked,” says Robert Eggert, who heads Blue Chip Economic Indicators in Sedona, Ariz. “But personally, I think there is a chance that rates could shade a bit higher before they start on their downward trend,” Eggert says.

Experts who are predicting lower interest rates in the United States, however, are generally looking only at domestic economic factors. Kellner, for instance, believes that rates will soon start to decline because the Federal Reserve will discover that the nation’s economy isn’t nearly as strong as some think and that inflation isn’t nearly as bad as it now looks.

Under those conditions, lower interest rates might not be totally welcomed by the stock market. If economic growth does turn out to be much slower than people think, stock prices on Wall Street could retreat on new-found fears that corporate profits will sink.

So while the pressure on stocks now being exerted by interest rates might ease, Wall Street could remain under attack from these other unfriendly economic forces.

One other thing could go wrong. As I’ve said, the experts who are forecasting that interest rates will decline are basing their predictions mainly on domestic factors.

But if interest rates go up overseas, the state of the U.S. economy may not have that big a role in dictating U.S. interest rates.

Under the worst situation, the United States could find itself in the very unusual situation of having a slowing economy and higher interest rates simultaneously.