What is the relationship between investor personalities and investment decisions?

“[…] Optimism is based on the fact that we do not fit in to the world.” — Gilbert K. Chesterton

One of the main inquires my students ask for along the course I teach in a college in Mexico its about the soft skills that the market demands as an investor. Over the last 50 years, the literature about the qualifications and personalities about investors is quiet long. Probably many of us got interested in these kinds of topics after an internal dialogue with ourselves to pursuit better and more magnanimous goals.

Several researchers, such as Florencio Lopez-de-Silanes[1], have taken serious journeys along corporate governance and investor protection. But empirical studies about individual investor characteristics do not fully account enough information about the observed heterogeneity. Ultimately, literature that uses surveys to study people's investment decision process have increased[2]. That is the reason I would like to share some ideas and findings about a recent paper published in the Journal of Financial Economics called “Personality differences and investment decision-making” [3] that I consider relevant for discussion nowadays.

In this paper, Jiang Z. et al. (2024) provide a new set of individual attributes to shed light on the financial decision-making process, given that persistent differences in personality traits are related to persistent differences in both beliefs and investment decisions. They provide two main reasons: First, personality traits are important for various life outcomes, such as health and ageing, marital and career success, and economic decisions such as spending behaviours (Becker et al., 2012); and second, many concepts coined by personality psychologists, such as Neuroticism and Conscientiousness, are related to and potentially complementary with concepts developed by economists, such as risk aversion and time preference.

For the empirical analysis of this paper, they present a stylised model of portfolio choice to illustrate possible connections between personality traits and portfolio decisions. Then, they designed and administered a nationwide survey in the U.S.[4] to collect information on personality traits and investment decisions using personality traits in the Big Five dimensions: Extraversion, Agreeableness, Openness, Conscientiousness, and Neuroticism. The size of the data set was 3,325 completed voluntary responses, with a median reported wealth of 3.5 million U.S. dollars from investors surveyed.

This paper provides four main findings based on correlations between personality traits and asset allocations:

1. The Big Five dimensions traits remain to have significant power in explaining belief heterogeneity. But neuroticism stands out: investors with a high degree of neuroticism are more pessimistic about future average stock returns and assign a higher probability to a crash. They are also more pessimistic about future economic growth and expect higher inflation.
2. Personality traits are also related to risk preferences: Investors with a high degree of openness are more willing to take risks.
3. Investors who score high on Neuroticism or low on Openness tend to invest less in equities. However, these two traits appear to affect investment decision-making through different channels: high Neuroticism is associated with pessimistic beliefs about future stock returns and tail risks, while low Openness is associated with high risk aversion.
4. Personality traits also affect other aspects of belief formation and portfolio decisions. For example, investors react differently to the behaviour of people in their social circle: those who score high on Neuroticism and Extraversion are more likely to adopt a particular investment when it becomes popular with those around them.

These findings are relevant because they explain how personality traits may affect investment decisions via channels like beliefs, preferences, and social interaction tendencies.

Moreover, to examine the robustness of their results, they conduct a similar analysis using two additional datasets surveys from Australia and Germany[5]. Once again, the traits Neuroticism and Openness stand out, and their associations with investors' actions are qualitatively the same as in our US survey.

Therefore, it seems that only two traits, Neuroticism and Openness, are particularly important in explaining equity investment, through two different channels: Neuroticism through beliefs and Openness through preferences.

So I encourage you to ask yourself the following question: How do the personality traits of investors in your country relate to these results?

[1] He was professor of Finance during my Master studies in the University of Navarra. He is a former professor of Harvard Business School (HBS) and current professor in SKEMA Business School.

[2] See Choi and Robertson, 2020; Giglio et al., 2021; Chinco et al., 2022; or Liu et al., 2022

[3] Zhengyang Jiang, Cameron Peng, Hongjun Yan, Personality differences and investment decision-making,

Journal of Financial Economics, Volume 153, 2024, 103776, ISSN 0304-405X, https://doi.org/10.1016/j.jfineco.2023.103776

[4] Through the American Association of Individual Investors (AAII)

[5] The Household, Income and Labour Dynamics in Australia (HILDA) survey and the German Socio-Economic Panel (GSOEP) survey