Investing study: 2 personality traits ‘differ in their explanatory power for equity investing’

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Your sociable, less predictable friends were more likely to join the meme-stock craze that captured the popular imagination in the post-pandemic bull market of 2021, a new paper suggests.

New research Find out who's more likely to invest in stocks, who's more likely to avoid them, and who's more likely to follow a meme-stock or crypto-type trend.

The researchers – Dr. Zhengyang Jiang from Northwestern University's Kellogg School of Management, Cameron Peng from the London School of Economics, and Hongjun Yan from DePaul University's Department of Finance – assessed investors' personalities using the Big Five model.

They found that two personality traits, neuroticism and openness, “stand out in their explanatory power for equity investing. Investors with high neuroticism and those with low openness tend to allocate less investment to equities.”

The study, the researchers argue, could help financial advisors guide investors to make better investment decisions and help shape better policy around investing. He also said that it could lay the foundation for more nuanced research into financial behavior.

“If you look at the past episode of GameStop … or even more recently FTX, you can think: what is luring people to invest in those things and is it good?” Dr. Jiang, one of the authors of the study, told Yahoo Finance. “And these things will be useful for brokerage companies or stock investment firms as well as regulators to understand because it helps them to make better regulations or better products that help people.”

‘pessimistic people'

Developed in the 1930s and 1940s, The Big Five model became established in the 1990s and early 1990s as the best approach to understanding personality, according to Dr. David Condon, a personality psychologist at the University of Oregon who was part of the study. were not

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“The Big Five are best viewed as an empirically supported, consensus-staged approach to thinking about personality,” Condon said. “Personality psychologists have been building the Big Five for a generation now.”

Based on his analysis, Jiang found that neurotic people tend to be wary of the stock market. For example, they tend to have pessimistic expectations for stock returns and are more likely to worry about a stock market crash.

“And they also have similar negative expectations about GDP and inflation, which means they believe GDP growth is low and inflation is high,” Jiang said. “So all those things align together and present us a picture that neurotic people tend to be pessimistic people.”

Traders work on the floor of the New York Stock Exchange on Tuesday, April 18, 2023 in New York City. (AP Photo/Ted Chaffery)

In contrast, Jiang said, people with high openness have a greater appetite for risk.

“So people who are more open to new ideas, artistic ideas, are also more likely to invest in the stock market,” Jiang said.

The study also found that investors who scored high on extraversion and neuroticism “were more likely to adopt a certain investment if it was popular with those around them,” the study said, such as meme stocks or crypto.

On the other hand, agreeableness and conscientiousness played less important roles in financial decisions, according to the researchers' findings.

‘This may be relevant for policy recommendations'

Condon agreed with the researchers that personality psychology could change the way major financial institutions assess investors and cited the example of an investment manager working with family funds and dealing with a client base in disarray. .

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“They may be groups that will meet you with educational advice about risk adjustment,” Condon said. “Or helping them get a better understanding of what the real risk of tail events is in these black swan events, in the hope that it will help them come up with more efficient investments.”

Similarly, Jiang explained that advisors can use personality psychology to encourage neurotic investors to engage in conservative, index investments that better fit their aversion to risk.

“We can push them a little bit to do things they're not comfortable with, based on their personality profiles,” Jiang said.

And it's not just consultants who can benefit. Lawmakers can design better policies that help investors avoid their worst impulses.

“If we can take a step back and ask why we want to study these issues in finance, you can see that it might be relevant to policy recommendation,” Jiang said. “It could point to potential education or policies that could help policy makers get better outcomes for people.”

‘Useful direction for future research'

Condon also noted the unprecedented nature of the study.

“It's highly innovative in that it's looking to take a more holistic approach to the relationship between personality and financial decision-making,” Condon said. “Trying to take a more holistic view of the personality angle is really innovative.”

He suggests that using the Big Five model of personality may be just the beginning, explaining that researchers are just beginning to use even more complex personality models to understand investor behavior.

“There are quite a few now and growing all the , some very large datasets that can allow finer-grained analysis of features and personality below the Big Five,” said Condon, the more specific characteristics of personality that influence investment decisions. Are “

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Jiang agreed, also saying that the study is about “merging the Big Five personality dimensions with asset pricing or financial applications”.

“Of course, we can also look at some more detailed things … I think those are also very useful directions for future research,” Jiang said. from psychology.”

dylan kroll The reporter and researcher is at Yahoo Finance. follow him on twitter @CrollonPatrol,

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