The Behavior of the Various Personalities of Secondary Equity Investors: Big Five Personality Model

Abstract

The personality of investors influences their behavior in terms of the behavioral biases exhibited and the returns earned in equity investments. By employing the Big Five personality model, the personality types of a sample of 436 secondary equity investors residing in Chennai, India, are identified, using the questionnaire survey method. The specific behavioral biases—mental accounting, anchoring, gambler’s fallacy, availability, loss aversion, regret aversion, representativeness, and overconfidence—are measured using scenario-based questions. Pearson correlation analysis is performed to identify the biases most likely to be displayed by each investor personality type. The personality dimensions of successful investors are determined using analysis of variance tests. The agreeableness and conscientiousness of investors yield high returns in the secondary equity market. A robust discriminant model is developed, with the investors’ financials and personality dimensions as predictors to discriminate between high and low returns. Wealth managers and financial advisers can apply the findings of the current article to customize trading strategies for their clients (investors) based on investor personality type. Such advisers can diplomatically caution clients to beware of the biases that they are likely to exhibit based on personality type. Financial managers and advisers can also focus more personalized attention on investor personalities that earn lower returns.

TOPICS: Behavioral finance in wealth management, wealth management, emerging markets, quantitative methods, statistical methods

Key Findings

• ▪ The personality of investors influences their behavior in terms of the behavioral biases exhibited and the returns earned in equity investments.

• ▪ Investors of each personality type are more likely to exhibit certain behavioral biases.

• ▪ Agreeable and Conscientious investors yield high returns in the secondary equity market.