How To Understand Our Investing Decisions

When researchers tried to use age, wealth, intelligence, financial literacy, and demography as the reasons for our investment decisions, they wound up dissatisfied. Finally, looking elsewhere, they concluded our personality provided more insight.

That took them to individuals whose median wealth was $3.3 million, 3,325 completed questionnaires,  and the Big Five personality traits.

Investing Decisions

The Big Five

With psychologists calling Extraversion, Neuroticism, Agreeableness, Openness, and Conscientiousness the Big Five, Neuroticism and Openness stand out for finance. Those of us with “neurotic” tendences display more pessimism and distress. On the other hand, having an Open personality means we are more creative, more comfortable with emotions, and more open to new ideas. Finally, though relevant, Extraversion and Conscientiousness had less financial relevance while Agreeableness had almost none.

The Questionnaire

Starting with personality and then performance expectations, participants were also asked about asset allocation and demography. Their answers demonstrated that participants were predominantly white, male, and older than 60 years old. Compared to the entire population, they were wealthier and more educated.

You can see how, together, it all forms a jigsaw puzzle with researchers deciding how the pieces fit together. In the personality section, you had to indicate how accurately the following reflected how you felt:

From there, the investing questions ranged from when you think a stock price will rise to whether you invest like your friends. Then, moving from opinions, the survey asked for actual financial decisions. For example, participants were asked how much they had in retirement accounts. It concluded with demographic facts.

Our Bottom Line: The Results

If you feel most comfortable allocating less to equities (stock), it is likely that you scored high on the Neurotic scale and low on Openness. Individuals that displayed stronger Neurotic tendencies expected lower returns, high inflation, and maybe even a crash. By contrast, the Open cohort was more willing to take risks.

In addition, among other topics, the researchers alluded to the Utility (defined as satisfaction) some extroverts got from the social side of investing (“independent of the returns”). I wonder if utility could be the key to understanding why we make different investing decisions.

My sources and more: Today’s post was entirely based on this NBER paper.