As part of a collaborative project, Curtin University researchers have found certain personality traits influence a traders’ investment decisions and subsequently impacts upon their outcomes of investing in the stock market.
In a series of three studies, researchers focused on two important features of finance – risk-taking and overconfidence – through the application of the Five-Factor Model of personality traits, to understand how personality explained the phenomena, and how this could be related to investors and advisors.
The Five-Factor Model is the dominant paradigm in personality research and is based on genetics and rooted in biology. It summarises personality using the “Big Five” traits of extraversion, agreeableness, conscientiousness, neuroticism and openness to experience/intellect.
Project-lead Professor Robert Durand from Curtin’s School of Economics and Finance said people will take or avoid risks to achieve goals consistent with their personality traits.
“Extraverts for example, may take increased risks due to their need to seek excitement; people high in conscientiousness may be more cautious in taking risks due to their need for control, order, and self-discipline; and people high in neuroticism may avoid risks due to fear of negative consequences,” Professor Durand said.
Professor Durand said previous behavioural finance research had not considered the role of personality traits to any great extent, despite a range of ideas embedded in psychology.
“Personality is at the core of decision-making. Understanding how the personality traits of investors relate to investment decisions and outcomes may link the many behavioural explanations used in finance. This has important implications for investors,” Professor Durand said.
“It also has important implications for our understanding of finance; as we potentially have an understanding of how various, seemingly unrelated, phenomena, are linked.
“Investors construct portfolios that are congruent with their personalities, and self-knowledge might lead investors to articulate and understand the type of decisions they make and from this understanding, investors might be able to modify their behaviour, and also avoid some mistakes.
“Understanding the movements and decisions of other traders based on their personalities could also prove beneficial to investors.”
The studies were published in the Journal of Behavioural Finance and the Review of Behavioural Science.
The research was done in collaboration with Monash University and The University of Western Australia.