INFLUENCE OF INDIVIDUAL INVESTOR’S

PERSONALITY IN STOCK MARKET INVESTMENT

DECISION
 INFLUENCE OF INDIVIDUAL INVESTOR’S PERSONALITY IN
STOCK MARKET INVESTMENT DECISION
INTRODUCTION

Behavioural finance studies the effects of psychological, cognitive, emotional, cultural and

social factors on the decisions of individuals and institutions and how those decisions vary
from those implied by classical economic theory. Behavioural finances is primarily
concerned with the bounds of rationality of economic agents. Behavioural models typically
integrate insights from psychology, neuroscience and microeconomic theory.

Kahneman and Tverskey (1979) proposed the prospect theory to explain decision-making
behaviour under uncertain circumstances. According to the prospect theory, psychological
factors of investors will drive their actual decision-making process to deviate from
rationality, which is continued to Simon’s (1957) argument of bounded rationality. There is
also a wide consensus in the behavioural finance literature that the investment decision-
making process is significantly shaped by psychological factors, such as moods, emotions or
personality traits [Akerlof, Schiller, 2009; Camerer, Loewenstein, 2003; Pompian, Longo,
2004; Szyszka, 2013].

The normative model of traditional finance is based upon the argument that market
participants are perfectly rational and therefore process all market information accurately. On
the other hand, the descriptive model of behavioural finance suggests how market
participants actually behave in reality, which is in accordance with the decision-making
model used in psychology.

In one of the sub-disciplines of psychology, i.e. personality psychology, it is argued that

personality is one of the key determinants of human behaviour. In behavioural finance
literature, a number of studies have modelled the trading behaviour of investors based upon
rich insights absorbed from psychology.

Many of the researches extends the theory of planned behaviour incorporating the big five
personality taxonomies to investigate the effects of the personality traits of individual
investors on stock investment intention. Some earlier research in economics and finance has
used the Big Five personality traits which includes openness to experience,
conscientiousness, extraversion, agreeableness, and neuroticism.

From the perspective of the marketing of financial services, by identifying the trait
characteristics of segments of consumers relative to their propensity to invest in stocks, it is
possible to tailor messages that influence people to invest for the long term. Many researches
shows that different approaches are needed to encourage differing personality types to
participate in the stock market for improved retirement planning.

LITERATURE REVIEW

Kahneman and Tverskey have developed the applications of psychological knowledge in

financial and economic sciences in a series of articles that they presented the theory of
prospect in 1979. This theory shows that how investors ignore utility in some cases. Finally,
their efforts lead to the Noble Prize in 2002 by Kahneman. Based on the prospect theory,
investors have an extreme tendency towards keeping securities which are in loss (due to not
identifying loss) and vice versa, they tend to sell the securities which have profit (due to
identifying profit). This bias is based on a mental accounting framework, that is so-called the
disposition effect (Shefrin, Statman, 1985).

In addition to disposition effect, there are other types of investment biases. For instance, if
investors overestimate their own abilities of accurate forecast, they may be regarded as
overconfidence. Such as investment bias would also lead to a return decrease on investment
(Hirshleifer‚ 2001). Some studies indicate that males were more overconfidence than
females, and the return rate of males were causing decrease 2.65%, but only causing decrease
1.72% for females (Barber, Odean, 2001). Tourani-Rad and Kirkby 2005) examined
optimistic and overconfident investors in New Zealand who believe they have investment
ability and knowledge to understand the latest market trends or select the next hot stocks.
Research indicated that investors’ behavior will be affected by personality traits,
interpretation of information, responses of sentiments, return and risk (Maital et al; 1986).
There were many researches using various dimensions to deal with the measurements of
personality traits, Myers-Briggs Type Indicator (MBTI) by (Myers‚ McCaulley‚ 1985); Big
five personality traits (Costa ‚ McCrae‚ 1992).

Prior work on factors related to stock market participation include pecuniary costs (Vissing-
Jørgensen (2003)), awareness (Guiso and Jappelli (2005)), and financial literacy (Van Rooij
et al. (2011)). Being more social may lower the cost of investing and increase stock market
participation (Hong et al. (2004)). The portfolio performance of one‘s social acquaintances is
positively related to stock market participation (Kaustia and Knüpfer (2012)). Personal
beliefs, such as trust in others (Guiso et al. (2008)) and political ideology (Kaustia and
Torstila (2011)) affect stock market participation. Cognitive ability (Cole and Shastry (2009),
Christelis et al. (2010), Grinblatt et al. (2011)) has a clear effect on stock market
participation. Dimmock and Kouwenberg (2010) use loss aversion from prospect theory
(Kahneman and Tverskey (1979)) to show that individuals that are more loss averse are less
likely to participate in the stock market.

Some earlier research in economics and finance has used the Big Five personality traits
openness to experience, conscientiousness, extraversion, agreeableness, and neuroticism (see
e.g. McCrae and Costa, 1997). Pompian and Longo (2004) used Myers-Briggs Type Indicator
for assessing personality of individual investors and found that various personality types can
fall prey to cognitive biases. They suggested that knowing the personality type of investors
can help advisors to build better portfolios. Hunter and Kemp (2004) investigated the impact
of personality on investment decisions and found that investors with openness trait were
likely to be more e-commerce because they are more receptive to new ideas, approaches and
experiments. Using the Big Five personality taxonomy, Mayfield et al. (2008) attempted to
establish a linkage between investor personality and risk aversion. They found a negative
relationship between openness and risk aversion. They claimed that open-minded investors
are more likely to be creative and non-traditional in their experiences, and therefore may take
more risks in their investments. Similarly, Filbeck et al. (2005) used Myers-Briggs Type
Indicator to develop a link between personality and risk tolerance. They argued that
individuals who are objective, orderly and concrete tend to have greater risk tolerance toward
their investment. Mayfield et al. (2008) also found a negative relationship between
extraversion and risk tolerance but Filbeck et al. (2005) reported no significant relationship
between the two variables. In a financial experimental market, vanWitteloostuijn and
Muehlfeld (2008) illustrated that traders’ personalities such as locus of control, maximizing
tendency, regret disposition, self-monitoring, sensation seeking and type-A and type-B are
associated with trading. Durand et al. (2008) showed that the Big Five personality is
associated with investors’ trading behaviour. They found a negative relationship between
extraversion and trading. These findings are in contrast to the prior theoretical prediction that
sociable individuals tend to trade more. In the same way, Durand, Newby, Tant and
Trepongkaruna (2013) found a negative relationship of extraversion with trading. They
suggested that extraverted individuals tend to have higher bid-ask spread and therefore are
less willing to trade frequently. Durand et al. (2008) found a positive relationship between
negative emotion and trading frequency, which is in line with the argument that neurotic
investors trade more to reduce unpleasant feelings brought about by external stimuli. Durand,
Newby, Peggs and Siekierka (2013) found positive association of conscientiousness with
trading behavior. These findings also match with those of Durand, Newby, Tant and
Trepongkaruna (2013) who postulated that conscientious individuals exercise their efforts to
achieve desired results and hence trade more.

Brown and Taylor (2014) investigated the relationship between the Big Five personality traits
and household financial decision making. They found that certain personality traits, such as
extraversion, are significantly associated with unsecured debts and financial assets. More
recently while analysing the relationship between personality traits of Finnish individuals and
stock trading behaviour, Conlin et al. (2015) found that various personality traits (novelty
seeking, reward dependence, harm avoidance and persistence) and the sub-scales of these
traits, measured by Temperament and Character Inventory of Cloninger et al. (1993), are
significant predictors of investors’ stock market participation. Yang et al. (2012) showed that
trader personality moderates the relationship between investor confidence and investor
trading volume. They found that if the personality of traders tends to be extraverted and
conscientious, it is more likely to raise the confidence of investor which in turn leads investor
to trade more.

DISCUSSION

Research suggests that personality traits influence individuals’ investment decisions. Big Five
Personality traits are

Extraverted individuals:

Individuals with extraversion trait are generally social, energetic and are actively involved in
outside world. The nature of extraverted individuals tends to be talkative and outgoing which
results in frequent interaction with other people around them. Extraverted investors prefer to
consider other people as a source of information. They tend to have warm relationships with
others and are able to acquire bulk information from a growing social network. Extraverted
investors are able to derive greater value from social interaction and are likely to believe in
the information that they acquire from their peers in the market. Based on such information,
they are more likely to trade stocks because such trading activities enable them to identify
with people in a social relationship. An investor with a dominant extraversion trait may
overestimate the gain and underestimate the loss, owing to his optimistic character.

Agreeable individuals:

Agreeable individuals are usually cooperative, reliable, modest and respect others’ opinion
and advice. An investor with a dominant agreeableness trait is more likely to rely on an
analyst’s opinion and finds it difficult to make his/her own investment decision. Individuals
with agreeableness trait tend to be trustworthy, compassionate and seek to maintain
conformity with their peers. Agreeable individuals are more likely to avoid conflicts with
others. Consequently, they tend to believe in the truthfulness of information provided by
others without critical evaluation. Agreeable individuals tend to be naïve, and lack personal
adequacy as well as self-confidence. This makes them extremely fearful of social
disapproval; therefore, they always look forward to complying with the expectations of
others.

The trading behaviour of agreeable investors also reflects more of others’ desires rather than
investors’ own judgment. In order to ensure harmony in social relations, agreeable investors
tend to believe in the information acquired from their peers, after which they consequently
follow herd behaviour in the market and trade stocks intensively.

Conscientious individuals:

Conscientiousness reflects the tendency of people to be efficient, organized and responsible

High conscientious individuals are dutiful and are more likely to have a problem-solving
approach. They show active involvement in decision making by taking matters into their own
hands. They have a strong desire to work for their success, therefore, they keep on working
until the problem is solved, regardless of how much time and effort is required.

Conscientious investors are able to obtain relatively high quality and pertinent Information.
Based on such information, they work hard to complete trade transaction with the highest
possibility to achieve the best results of investments. Consequently, they are more likely to
trade stocks frequently. Conscientious individuals have a certain degree of confidence and are
careful, analytical, methodological and self-disciplined and tend to have clear investment
goals.

Neuroticism:

Neuroticism is related to emotional instability, depression and self-centeredness. Individuals

with neuroticism trait are more inclined to experience negative emotions such as anxiety,
depression, pessimism, anger and fear. High neurotic individuals acquire bulk information
before making any decision, in order to find peace from disturbing thoughts that trouble
mind. In fact, they frequently seek out information to make sure that they know every
important aspect of a given situation as they believe that knowing more is always better than
getting unpleasant surprises.

High neurotic investors are sensitive to external stimuli in their environment. Anxiety
increases nervousness in neurotic investors, which in turn increases the fear of unfamiliar and
uncertain situations. Even if they acquire relatively more information for trading decisions,
they feel insecure about the trading results because they focus only on risk and uncertainty
instead of potential reward offered by stock market, and consequently they tend to make
fewer trading decisions. Highly neurotic individuals tend to overestimate the risk when the
market crashes and may underestimate gain when the market is favourable.

High openness to experiences:

Big Five personality shows that individuals with openness trait are more likely to be creative,
imaginative and tend to investigate everything eagerly Open-minded individuals usually
welcome information in all contexts and have a positive attitude toward it, whether it is
acquired by them or encountered by the way. Although open-minded individuals employ
creative methods to acquire bulk information from a wide variety of sources, it does not mean
that they accept everything readily. They are often inquisitive and thus do not readily believe
in the information obtained from others. They tend to investigate thoroughly to find
alternative solutions to the problem. Instead, their basic questioning attitude is welcoming yet
sceptical at the same time. They keep investigating until they find credible information.

Investors with high openness to experiences show a strong preference for sensation, new
things and complexity. He/she easily accepts new market information and may frequently
change investment portfolios with changes in market situations.

Stock investing Behaviour and Personality Traits:

The moderating influence of investor personality on the relationship of information

acquisition and trading frequency was tested according to the conceptual model given below.

1. Openness negatively moderates the relationship between information acquisition and

trading behaviour.
2. Conscientiousness positively moderates the relationship between information
acquisition and trading behaviour. The association between information acquisition
and trading frequency is strengthened by conscientiousness. Conscientiousness
predicts asset accumulation.
3. Extraversion positively moderates the relationship between information acquisition
and trading behaviour.
4. Agreeable individuals tends to save less and borrow more in stock market. The
relationship between information acquisition and trading behaviour is strengthened by
agreeableness. Investors endowed with higher degrees of Agreeableness and Cynical
Hostility are less prone to take financial risks, ceteris paribus. Agreeableness
positively moderates the relationship between information acquisition and trading
behaviour.
5. Neuroticism moderates the pattern of port- folio monitoring. The association between
the frequency of information and trading frequency is dampened by neuroticism.
Neuroticism negatively moderates the relationship between information acquisition
and trading behaviour.
The Big Five Personality Traits
 Openness
 Conscientiousness
 Extraversion
 Neuroticism
 Agreeableness

Information Acquisition Stock Trading Behaviour

Investor’s Socio-economic Characteristics

 Gender
 Marital Status
 Age
 Education
 Income
 Experience
 Risk Aversion
 Financial Literacy
 Moderating influence of the Big Five personality traits on the association between
information acquisition and stock trading behaviour
Comparing the Traits of Stock Market Investors and Gamblers:
When comparing stock market investors with Gamblers, we consider 3 more additional
personality traits in addition to Big 5 personality traits. They are the need for arousal, the
need to protect and enhance the body, and the need to protect and enhance material resources.
1. The traits receiving the greatest support as predictors of gambling are the need for
arousal and the closely related traits of sensation seeking and optimum stimulation
level. The risk associated with gambling increases physiological arousal, which
should be sought after by those with a high need for sensation.
Same relationship will be found for stock investing. That is, because of the risk
involved, those who are more active stock investors will have a higher need for
arousal. Thus, both stock market investors and gamblers share a trait involving risk-
taking propensity, which is assessed by the elemental trait of need for arousal.
2. There exists a positive relationship between emotional instability and gambling
behaviour. Gamblers are higher in emotional instability (neuroticism). Theoretically,
for individuals with high levels of emotional instability, gambling may provide a
useful means to cope with anxiety and depression.
Emotional instability will be negatively related to stock investing.
3. Extroversion will be positively related to stock investing propensity. There is no
research evidence which shows that extroversion has positive link to gambling
4. Agreeableness will be negatively related to stock investing propensity. Agreeableness
which is part of the big 5 personality trait does not have any impact on gambling.
5. One motive for gambling and for investing is the desire to make money. Thus it is
generally assumed that economic incentive is one of the primary motives for most
gamblers. The need for material resources will be positively associated with stock
investing propensity for similar reasons.
Thus, like gamblers, people invest to make money. A trait that is closely related to the
motive of making money is materialism. This suggests that the desire to enhance
one’s level of material resources is likely to be a motive for gambling and investing.
6. Competitiveness will be positively related to gambling propensity. To deal with the
inevitable losses that occur when investing, those who enjoy investing will have a
higher need to compete. That is, those with a need to compete are able to deal with the
possibility of loss because that is inherent in competition.
In addition, there is an element of a zero sum game when investing in the stock
market, which appeal more to competitive individuals. That is, one person wins and
another loses, which is at the heart of competition.
7. Impulsiveness will be positively related to gambling propensity. If anybody wants to
take advantage of some market chances, he/she has to act very quickly.
8. Because investing in the stock market is part of retirement planning behaviour,
present-time orientation will be negatively related to stock investing propensity.
Gamblers will tend to have a present-time orientation because they are seeking short-
term gains.
9. To be successful, stock investors must collect a great deal of information and have a
desire to learn about the companies or mutual funds in which they invest. In contrast,
 because gambling has a larger chance component than stock investing, there is no
significant relationship.
10. Superstitious beliefs may give gamblers an illusion of control and the false perception
that one can influence the outcome of a chance event. Thus, superstition will be
positively related to gambling propensity. Superstition will be positively related to
stock investing propensity.
11. Because both investing and gambling involve the possibility of taking a loss, a
measure of financial conservatism will be negatively associated with each construct.
Both pursuits have elements of a zero-sum game, that is, for every winner there is a
loser. Thus, in both pursuits there is a possibility of losing money, which a highly
financially conservative person would find distasteful.
12. Both gambling and stock investing involve a heavy use of numbers. In gambling,
numbers are used to calculate the odds of winning. In investing, numbers must be
understood to read financial statements and market data and estimate the future value
of a company.

CONCLUSION:
Stock trading activities are negatively related to financial conservatism. Behavioural finance
incorporates the concepts of social sciences in understanding the investors’ behaviours. The
researches show the linkages among the personality traits and perceptions of individual
investors and their impacts on stock investment intentions. Subjective norm, attitude towards
stock investment, and perceived behavioural control are all revealed to significantly influence
the stock investment intention of an individual. Individuals are inclined to conduct a
behaviour if the key person or organization encourages such a behaviour. Therefore, having
media to report information about the facilities for stock investment and government policies
to encourage stock investment will increase individuals’ intention to participate in the stock-
investing activities. The attitudinal factor is proved to effect individual intentions for stock
investment. Hence, security firms can develop additional investment tools, such as mobile
applications, financial analysis software, and online investment services, in which innovative
investment portfolio techniques and knowledge are provided.
The research discovers that openness to experience and agreeableness significantly affect
subjective norm. As expected, an individual with a preference for variety and intellectual
curiosity (i.e., openness) is likely to be affected in forming his or her perceptions regarding
social pressure from others. However, surprisingly, the impact of agreeableness on subjective
norm is found to be significant and negative. The possible explanations could be that
individuals who show personal warmth and cooperation with others still have their own
opinions and less attention is paid to the peer influences regarding stock investment.
Neuroticism is shown to affect an individual’s attitude toward stock investment significantly
and negatively. For people who always feel inferior to others, anxious, and insecure tend to
ascertain that stock investment is harmful and that people will lose money in stock trading.
This finding would provide practical implications for the security practitioners that
persuading anxious individuals to invest in the stock market would be difficult. Besides,
agreeableness is identified to influence perceived behavioural control significantly and
negatively. The findings reveal that individuals with agreeable personality may spend their
money, time and energy in maintaining relationships with others and thus less control for
performing stock trading is perceived. The effects of extroversion, conscientiousness and
openness to experience on subjective norm are significant and positive. Accordingly, the
security practitioners could attempt to search for persons who are cheerful and extroverted,
strong-willed and conscientious, or individuals who are open to new things and ideas,
because these individuals may have more time, energy, or money for participating in stock
investment.
Imply that investment advisors should consider personal characteristics and individual risk
tolerance, among other factors, when giving investment advice to private investors. Financial
planners and advisors could look at investors’ personality traits to address the clients’
financial needs and advise them about relevant financial services in an efficient manner.