Investment management and personality type
Abstract We examine several psychological antecedents to both short term and long term investment intentions, with specific focus on the Big Five personality taxonomy. The effects of specific personality traits are evaluated using structural equation modeling (SEM) Our results indicate that individuals who are more extraverted intend to engage in short term investing, while those who are higher in neuroticism and/or risk aversion avoid this activity. Risk adverse individuals also do not engage in long term investing. Individuals who are more open to experience are inclined to engage in long term investing; however, openness did not predict short term investing. The implications of these findings are discussed. (c) 2008 Academy of Financial Services. All rights reserved. Keywords: Behavioral finance; intentions; investing; Big Five; personality 1. Introduction Researchers across the past several decades have analyzed the behavior of investors and have attempted to enhance our understanding of why people manage investments in different ways. Today an extensive body of literature exists that seeks to explain how personal characteristics influence the behavior of investors. If a common theme is present in this literature, it is that personal characteristics influence investors' perception of risk and their willingness to assume risks. In turn the perception of risk determines investing behavior. However, a prevailing question left unanswered is the extent to which individuals' personal characteristics influence their intentions about investing. If individuals' investment intentions are discernable, then educators and financial counselors would want to know if those intentions are amendable. The nature of risk and how individuals approach risk has been a developing discussion. The expected utility approach of von Neumann and Morgenstern (1947) has provided the foundation for the primary view of risk in economics and finance for many years. The main concept in their model is that the maximization of expected utility is the sole factor in making decisions. Extending their work Allais (1952) questions the exclusive use of the maximization of expected utility as a single criterion when making a risky choice, raising the issue of a person who could be faced with the trading off of expected return and the probability of reaching a given goal. In similar fashion Markowitz (1952) proposes a two criterion approach when an investor is faced with the desire for higher returns but not wanting the uncertainty of returns, which he perceives as risk. Many other researchers have extended this discussion. The literature has developed into two schools of thought as researchers have sought to explain the choices investors make about risk within their investments. One group of scholars has used demographic features that relate the significance of gender, ethnicity, wealth, income, and a variety of other factors to the explanation of investment management decisions. The other group has its foundations in psychology, using investors' psychological characteristics to explain choices that are made concerning investment decisions. Among what we describe as demographic studies, the implications of gender are most often perceived by researchers as being important in explaining investor behavior. Bajtelsmit and Bernasek (1996) Byrnes, Miller and Schafer (1999) Barber and Odean (2001) Felton, Gibson and Sanbonmatsu (2003) Hallahan, Faff and McKenzie (2004) and Worthington (2006) all reach the conclusion that gender plays an important role in general risk aversion. Bajtelsmit, Bernasek and Jianakoplos (1999) Hariharan, Chapman and Domian (2000) and Olsen and Cox (2001) arrive at the conclusion that women are not as likely to invest in higher risk assets as men possessing similar significant personal characteristics. Although an interesting array of demographic characteristics have been used to explain what drives the investment behavior of individuals, the discussion continues in the literature concerning the psychological antecedents mat would accompany this human behavior.