STUDY LINKS PERSONALITY TO INVESTMENT CHOICES
Written on the 1 April 2015
PERSONALITY traits can influence how people trade on the share market and impact investment outcomes, according to new research.
Researchers from Curtin University, Monash University and University of Western Australia conducted three studies to determine risk-taking and overconfidence by using the Five-Factor Model.
The Model is based on genetics and divides personality traits into categories including extroversion, agreeableness, conscientiousness, neuroticism and openness to experience.
Project lead and Curtin School of Economics and Finance professor Robert Durand says people will take or avoid risks to achieve investment goals that align with their personality.
"Extroverts for example, may take increased risks due to their need to seek excitement," Durand says.
"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 or negative consequences."
Durand says previous behavioural finance research neglected to investigate the impact of personal characteristics, despite it being at the core of decision-making.
He says delving deeper into the link between personality and investment decisions has important implications for investors and analysts.
"It also has important implications for our understanding of finance as we potentially have an understanding of how various, seemingly unrelated, phenomena, are linked," he says.
"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.
"From this understanding, investors might be able to modify their behaviour and also avoid some mistakes."
The studies were published in the Journal of Behavioural Finance and the Review of Behavioural Science.