A Study of Relationship between Personality Traits and Demographic Characteristics with Behavioral Biases of Individual Investors

Abstract

The world of standard finance considers an investor as rational economic human being and expects him to behave with perfect rationality, perfect self-interest and perfect information; however, in the real world with real investors, investments are not fully efficient. A real investor has limitation to information procurement and processing, and his decisions are also affected by his emotional preferences which may not have any sound basis. Given the above limitations of investors, investors end up taking imperfect decisions. One of the major thrust in the field of behavioral finance is to understand the way investors take decisions. Understanding the decision process of an investor is also necessary for client-advisor relationship, which in turn can help clients to achieve most optimal portfolio in accordance to their taste and knowledge, as well as, fulfilling if not all, but many of the principles of standard finance. Literature has indicated that personality trait and demographics have reasonable relationship with the way people invest. Intervention studies, along with studies in biology and neuroscience, establish a causal basis for the observed effect of personality traits on economic and social outcomes. Given that returns of investments are affected by behavioral biases and personality traits relate to economic outcomes, the relationship between personality traits and behavioral biases may provide a better insight as in which personality may be prone to which biases. Literature also suggests that demographics and investment choice are related in Indian scenario. If we connect this with the behavioral portfolio theory and framework of behaviorally modified asset allocation, then we have reasons to believe that there may be relationship between demographics and behavioral biases. This study reports the relationships between major biases, demographic variables and big five personality traits. The study is based on responses of 516 individual investors across Gujarat. The responses measured behavioral biases, personality traits and demographics of investors. In total 28 variables were studied for their relationship with the help of statistical tools like Chi-square analysis and binary logistic regression. Behavioral biases were studied as emotional biases and cognitive errors and their significant relationships with demographic variables and big five personality traits were reported. Of 17 behavioral biases studied, 3 did not have significant relationship with demographic and personality trait variables; while 2 biases had significant relationship with personality traits only, a total of 6 biases had significant relationship with only demographic variables and 6 biases had relationships with both demographic variables and personality traits. Relationships were reported for significance level of α = 10%. Considering relationships with significance level of α = 5% and below, residence (Urban/Rural) and gender were the prominent demographic factors which showed relationships with multiple biases hence must be considered with most importance while advising clients. It was found that rural investors are high on optimism and availability bias, while urban investors are high on regret aversion and conservatism bias. Similarly, for demographic variable gender, it was found that males are high with optimism bias, while females are high with overconfidence bias. For the relationship of behavioral biases and personality traits, relationships with significance level of α = 5% and below, suggested that 4 out of 5 personality traits of investor were prominent in having relationships with behavioral biases, namely, conscientiousness, agreeableness, extraversion and openness to experience. As the results suggest, higher the conscientiousness higher is the optimism and availability bias; higher the agreeableness, lower was the probability for the investor to be biased of self-control, but higher the probability of framing bias. This thus suggested that, agreeableness could be used in favour of client counselling, as counselling agreeable clients with positively framed examples could be helpful to advisors, thus agreeable clients could be easy to manage for financial decisions. Clients high on scores of extraversion are probable to demonstrate higher conservatism and mental accounting bias, while clients high on openness to experience are probable to be biased with optimism and are less likely to be biased of conservatism. This relationship also supports a common belief that individuals open to creativity and newer experiences should be less likely to be conservative. With the reported relationships, various future research avenues have been made available to seek the in-depth analysis of various psychological and cultural impacts which shape the investor behavior. The relationships reported could be further researched for relationships by chance, or as relationships that had conceptual frames but were yet not studied in practice or as relationships that can be retested in different scenario and thus present a case for further suitable analysis related to impact on markets and individual portfolios. These relationships tested on individual investors can stand as clues for studying consumer behavior and buying decisions. The implications are many as the study involves social, psychological and financial dimensions. The study is concluded with two graphs that could help the financial advisor predict the biases of investor he is dealing with.