Investor Behavior: The Psychology of Financial Planning and Investing

CHAPTER 6

Personality Traits

Lucia Fung

Lecturer in Management, Department of Management, Hong Kong Baptist University

Robert B. Durand

Professor of Finance, School of Economics and Finance, Curtin University

INTRODUCTION

Personality helps to identify who a person is and what motivates him or her (Allport 1966; Hogan and Hogan 1989; Dollinger and Orf 1991; Buss 1992; Langston and Skyes 1997; Soane and Chmiel 2005). Being aware of one's personality and motivation might enable a person to overcome emotions and biases when confronted with a choice. Self-knowledge might also help an individual to use information more effectively to improve decision-making.

Statman and Wood (2004) and Pan and Statman (2012) contend that knowing investors' personalities can help advisors build better portfolios. Pompian (2012, p. 11) maintains that “if you can identify what basic type of investor you are, and then diagnose your unique irrational behaviors, you will be in a much better position to overcome these behaviors and, ultimately, reach your financial goals.” For all these authors, personality is a guide to what a person should do.

Some theorists believe that human beings are rational entities. A rational evaluation of their options in each specific situation guides their behavior in each situation. Traditional or standard finance typically bases its analyses on this assumption. Other theorists such as Langston and Sykes (1997) argue against this situation-specific approach by asserting that ...