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April 11, 2023 at 02:10 PM
What You Need to Know
- A recent NBER paper explores the connection between personality traits and risk preferences, asset allocation decisions and views on the economy.
- Two traits in particular — neuroticism and openness — may have an outsize effect on investment decisions.
- Investors who score high for neuroticism and extraversion are also more likely to be influenced by the behavior of those around them.
Clients’ personality traits appear to play a significant role in their investment portfolio decisions, with openness and neuroticism showing particular relevance, new research suggests.
Highly neurotic investors — those who tend to worry about things and panic easily — and those who aren’t very open to new experiences tend to own fewer equity shares, according to a key finding in the working paper from the National Bureau of Economic Research.
An academic research team surveyed more than 3,000 wealthy American investors, asking questions that sought to elicit five key personality traits: extraversion, agreeableness, openness, conscientiousness and neuroticism.
The survey, distributed by the American Association of Individual Investors, also asked about risk preferences, social interaction tendencies, asset allocation decisions and expectations for key economic indicators.
The Role of Personality Traits
The power of the five personality traits to explain investor expectations for stock market returns and the economy is comparable to that of all demographic variables combined, including gender, age, income, wealth, education and location, the paper says.
The findings suggest personality traits may affect investment decisions through three distinct channels.
“The big five personality traits correlate with investors’ beliefs about the stock market and economy, risk preferences and social interaction tendencies,” the researchers wrote. “Two personality traits, neuroticism and openness, stand out in their explanatory power for equity investments.
Openness refers to the tendency to be open to new aesthetic, cultural or intellectual experiences, while neuroticism refers to a chronic level of emotional instability and proneness to psychological distress, they explained.
“Investors with high neuroticism and those with low openness tend to allocate less investment to equities,” they found. Those two personality traits appear to affect investment decision-making through different channels, the researchers — Zhengyang Jiang from Northwestern University, Hongjun Yan from DePaul University and Cameron Peng from the London School of Economics — added.
