Does Your Personality Shape Your Investment Strategy?

Source: www.towardsdatascience.com

Kellogg Professor Zhengyang Jiang, LSE Professor Cameron Peng, and DePaul Professor Hongjun Yan have written an interesting new paper titled, "Personality Differences and Investment Decision-Making."  They found several significant links between personality characteristics and the strategies individuals employed when making financial investment choices.  

First, they found a link between neuroticism and investment decisions. Neuroticism refers to a "tendency toward emotional instability and psychological distress including anxiety, depression, self-doubt, and other negative feelings." Jiang explains to Kellogg Insight that, “People with high neuroticism tend to be the ones who invest less in the stock market, even after we control for the other types of individual differences. People with lower neuroticism tend to take more risks and buy more stocks rather than safer bond assets."  

Second, the scholars discovered that openness is another personality trait that matters. In other words are people "intellectually curious, willing to try new things, and aware of their feelings?"  People who rate high on openness tend to invest more in equities and less in fixed income assets.   

Third, the examined whether certain traits make people more likely to follow the crowd with regard to investment choices.  The scholars discovered that, 

"Personality traits also shape how investors react to the behavior of people in their social circles. The study revealed that both neurotics and extroverts are more likely to adopt a certain investment when it becomes popular among the people around them, but their path to this decision is likely different.

'An extravert derives utility (and pleasure) from interacting with others and tends to copy their investment decisions after such social interactions,' the authors write. Neurotics may also copy their friends, but 'one possible explanation is that more neurotic investors have more fear of missing out (FOMO), and therefore tend to follow the crowd.'”

What does it mean for us as individual investors, as well as for the investment firms and financial advisers interacting with us?   The scholars conclude that we need to look beyond demographic attributes such as age or wealth, or typical questions about people's aversion to risk.  Understanding our personality can help us determine whether we might be making suboptimal decisions at times.