Investing study: 2 personality traits ‘stand out in their explanatory power for equity investments’

A new research study has explored the relationship between personality traits and investment behavior, with a particular focus on the recent meme-stock frenzy that took place in the post-pandemic bull market of 2021. The study was conducted by Dr. Zhengyang Jiang from the Kellogg School of Management at Northwestern University, Cameron Peng from the London School of Economics, and Hongjun Yan from DePaul University’s Department of Finance. The researchers used the Big Five model of personality to evaluate the personalities of investors and determine who is more likely to invest in stocks, who is more likely to avoid them, and who is more likely to follow meme-stock or crypto-type trends.

The study found that two personality traits, Neuroticism and Openness, “stand out in their explanatory power for equity investments. Investors with high Neuroticism and those with low Openness tend to allocate less investment to equities.” Specifically, the study found that neurotic people tend to be more wary of the stock market, have pessimistic expectations for stock returns, and are more likely to worry about stock market crashes. On the other hand, people high in openness tend to have a larger appetite for risk and are more likely to put their money into the stock market.

The study also found that investors who scored higher on extraversion and neuroticism were “more likely to adopt a certain investment when they became popular with people around them,” the study said, such as meme stocks or crypto. Agreeableness and conscientiousness, however, played less significant roles in financial decisions, according to the researchers’ findings.

The researchers argue that their study could help financial advisors steer investors into smarter investment decisions and help shape better policy around investing. For example, advisors could use personality psychology to encourage neurotic investors to engage in conservative, index investments that better fit their aversion to risk. Similarly, lawmakers could craft better policies that could help investors avoid their worst impulses.

Dr. David Condon, a personality psychologist at the University of Oregon who was not part of the study, agrees with the researchers that personality psychology could alter the way major financial institutions assess investors. He suggests that investment managers working with family funds and dealing with a customer base higher in neuroticism could use educational advice about adjusting for risk or helping them get a better understanding of the actual risk of tail events in black swan events to come up with a more efficient investment.

While the study is one of the first to merge the Big Five personality dimensions with asset pricing or financial applications, both the researchers and Dr. Condon believe that using personality models to understand investor behavior is just the beginning. Researchers have already begun using more complex personality models to understand investment behavior, and there are now quite a few large datasets that might allow a finer-grain analysis of features and personality below the Big Five. Overall, the study represents a fruitful direction for future research that could have significant implications for financial advisors, investors, and policymakers alike.