Does Personality Traits Influence the Choice of Investment?

-- K Chitra and Director, Department of Management Studies, Sri Ramakrishna EngineeringCollege, Coimbatore, India. E-mail: profkchitra@gmail.com V Ramya Sreedevi, II MBA, Sri Ramakrishna Engineering College, Coimbatore, India; and is thecorresponding author. E-mail: ramyasreedevi@gmail.com An investors investment in stock market is influenced by a large number of factors. Stock markets performance is not only the result of intelligible characteristics or herd behavior, but is also due to the influence of psychological and personality characteristics that are still baffling the analysts. The study focuses on analyzing the influence of seven personality traitsemotional stability, extraversion, risk, return, agreeability, conscientiousness and reasoningon the choice of the investment pattern. The results of the study show that these personality traits of the investors have an impact on the individuals while taking decisions and also have a strong influence on determining the method of investment. The study found that the influence of personality traits on the investment decision is more compared to that of demographic variables. Introduction Investment is doing an activity for making profit. The options for investment are huge and they have different combinations of risk-return trade-off. Investment can take the form of debt securities, mutual funds, stocks, derivatives, commodities and real estate. People are looking for the best investment option to get maximum returns. The survey conducted in India shows that the investment in stock market and mutual funds stand at fifth and sixth places, respectively, in the top 10 investment options in India. Understanding the financial personality is vitally important. It helps to understand why a person takes the decisions, how a person is likely to react to the uncertainty in investing and how a person can temper the irrational elements of investment decisions while still satisfying the individual preferences. In the international arena, Indians hold a good percentage of savings rate i.e., 30%.1 The average savings rate for US households as of May 2009 is 6.9%.2 Apart from the traditional forms of investment, Indians started investing in stocks, which have outperformed every other asset class from 2001 to 2007 as much as 60%. Yet, only 3% of the Indian population directly invests in stocks, considering the volatility in the stock market. Two lakh demat accounts are opened every month. Thirty-seven of the 50 companies in the Nifty index have seen an increase in the NRI investor base in the last three years. In this scenario, it is important to understand the investment behavior of the individuals as it has a direct effect on the performance of the stock market. Indian investor, in the recent years, had endured a sluggish economy, steep market declines prompted by deteriorating revenues, alarming reports of scandals and changes in the global

economy. Stock markets performance is not only the result of intelligible characteristics, but is also due to the influence of psychological and personality characteristics that are still baffling the analysts. Investors who understand and control their emotions and incorporate them into an investment strategy tend to feel more confident about their investment choices and are more likely to stick to their investment plans and achieve their financial goals. Against this background, the present study is undertaken to analyze the influence of personality traits on the investment with special reference to emotional stability, extraversion, risk, return, agreeability, conscientiousness and reasoning. Theoretical Background The research paper focuses on identifying the seven personality traits of the investors. It also focuses on identifying the five demographic variables. Personality Traits The seven personality traits were identified based on the Big Five personality model. The characteristics and the terms representing each personality trait were coined by the authors for the purpose of this study. Emotional stability describes whether the person is emotionally stable while taking an investment decision. Based on this, the investor is classified either as rational investorthe investor takes decisions on investment based on facts and not on emotionsor emotional investorthe investor takes decisions based on emotions. Extraversion describes the social boldness of an individual. The investor is classified either as an extrovertthe investor is assertive and likes to move with peopleor an introvertthe investor is shy, quiet and prefers to be alone . The third trait is Risk. This trait defines the risk taking ability of an individual. Based on this trait, the investor is classified as either risk loverthe investor likes to take risky decisionsor risk averterthe investor is against taking risks. The next trait considered is Return. It defines the expectations of an individual on returns through his investment decisions. Here the investor is classified either as more economic investorthe investor expects more returns to less risk takenor economic investorthe investor expects moderate returns. The fifth trait considered is Agreeability. This trait describes as to how a person responds to the information he receives on investments. Based on this, the investor is classified either as skeptical investorthe investor suspects the information he gets. His views differ from the views of the other investors, or trusting investorthe investor trusts the information and accepts it. The next trait is Conscientiousness. It describes the cognitive ability of the individual while taking decisions. Based on this, the investor is classified either as moral investorthe investor takes the decisions based on his conscientious and analyzes whether it is right or wrongor expedient investorthe investor takes a clever decision though it is not moral. The last trait is Reasoning. This trait analyzes the basis of decision making by an individual. Here, the investor is classified either as abstract investorthe investor takes decisions based on

ideasor concrete investorthe investor takes decisions based on facts. Demographic Profile The demographic variables taken for analysis are age, family size, monthly earnings, occupation structure and education. Investment The investments taken for analysis are equity, derivatives and commodities. Review of Literature Grinblatt et al. (1995), in their study, analyzed the extent to which the mutual funds investors purchase stocks based on their past returns and the influence of herd behavior. Around 155 mutual funds were analyzed for the 10-year period. The tendency of the individual funds to buy past winners as well as to herd was highly correlated to the fund performance over the period of the study. The results show that 77% of mutual funds were momentum investors buying stock of past winners but did not sell those of past losers and the funds invested on momentum realized significantly better performance than others. Barber and Odean (2000), in their study, analyzed the common stock investment performance among the individual investors. The study was conducted among 66,465 households who traded at a large discount brokerage firm for six years. The results show that average household earns an annual return of 16.4%, tilts its common stock investment toward high-beta, small, value stocks, and turns over 75% of its portfolio annually. Overconfidence can lead to high trading levels and result in poor performance of individual investors. The authors concluded that trading is hazardous to investor wealth. Shapira and Venezia (2001), in their study, analyzed the investment behavior of the clients in a major brokerage firm in Israel. The behavior of the clients who made independent investment decisions were compared to those clients whose accounts were managed by the brokerage professionals. The results show that the disposition effect was higher for individual investors and the professionally managed accounts were more diversified in investment and had slightly higher returns compared to independent investors. Lodi-Smith and Brent (2007) have analyzed the relationship between social investment and personality traits. The study used the meta-analytic technique to identify the cross-sectional patterns of relationship under social investment in four roles as work, family, religion and volunteerism and the personality trait domains of agreeableness, conscientiousness and emotional stability. The results show that the extent of investment in social roles across these domains is positively related to agreeableness, conscientiousness, emotional stability and low psychoticism. The social investment in volunteer activity was positively related to conscientiousness. Linden et al. (2010) have presented a meta-analysis on the correlation between the Big Five personality traitsextraversion, conscientiousness, openness, agreeableness and neuroticismto

analyze the General Factor Personality (GFP). A multi-method validity study testing was done to identify the relationship between the GFP and supervisor-rated job performance. The results of meta-analysis provided supporting evidence for the two meta-factors, stability and plasticity and a GFP at the highest hierarchical level. The validity study indicated that the GFP has a substantive component as it is related to supervisor-rated job performance. Objectives The objectives of the study are to identify the personality traits of the investors and to analyze the influence of personality traits on the investment method; to analyze the relationship between demographic profile of the investors and the method of investment; and to identify the variables discriminating the investment. Methodology The study is descriptive. The variables considered are personality traits, demographic variables and the investment methods. The study was conducted in a brokerage firm where the population was 1,587 investors. According to the systematic method [n = N/(1+N (e) ^2)], the sample size was calculated (94 investors). The methodology used was Systematic Random Sampling (SRS). The data was collected from the sample through a specially designed questionnaire consisting of three parts. The first part deals with the personality traits; the second part with the investment method of the investors; and the third part deals with the demographic variables. The questionnaire was prepared based on the scoring method. Each personality trait was analyzed through a set of questions. Each option under a question was given a score. The scores under each personality trait were then added up to analyze a particular trait. They were categorized as described above under each personality trait. Discussion The results on the analysis of the personality traits of the investors are given in Tables 1 and 2. From Table 1, it is found that a majority of the investors are emotional, extroverts, risk lovers, more economicfocussing on more returnsskeptical in their views, moral while taking decisions and concrete on their ideas for decision making.

From Table 2, it can be inferred that most of the investors fall between the age group of 26-35 years. A majority of the investors are undergraduates. Most investors family incomes lie between 11,000 and 20,000. A majority of them are business persons and many investors family size is 4. In order to analyze the relationship between the demographic profile of the investors and preference towards the method of investment, the following hypothesis is framed. H1: There is no significant relationship between the demographic profile of the investors and the preference towards the method of investment. The demographic variables considered for the study are age, education, family monthly earnings, employment status and family size. The influence of demographic variables on the choice of investment, viz., equity, derivatives and commodities are taken into consideration. The results of the chi-square test are presented in Table 3.

It can be inferred from the p values that a relationship exists between employment status and preference towards equity investment, as p value is less than 0.05. In all the other cases, there is no significant relationship between the other demographic variables and the investment. The hypothesis framed to ascertain the relationship between personality traits of the investors and the choice of investment is, H2: There is no significant relationship between the personality traits of the investors and the method of investment. The personality traits considered are emotional stability, extraversion, risk, return, agreeability, conscientiousness and reasoning. The influence of personality traits on the choice of the investment, viz., equity, derivatives and commodities are taken into consideration. The results of the chi-square test are presented in Table 4. From Table 4, it can be inferred from the p values that a relationship exists between emotional stability and choice of equity as an investment and a relationship exists

between emotional stability and derivatives investment as p value is less than 0.05. In all the other cases, there is no significant relationship between the personality traits and the method of investment. Discriminant analysis is performed to identify the variables discriminating the various methods of investment. The results are shown in Table 5a. In Table 5a, since all the p values are less than 0.05 for Function 1, it is considered for identifying the discriminating variables. Function 2 is not considered, since the p values are greater than 0.05.

The discriminating variables of investments in equity are emotional stability, returns, extraversion, age and family size. In case of derivatives they are emotional stability, returns, extraversion, conscientiousness, family monthly earnings, age, employment status and risk. For

commodities, they are age, conscientiousness, emotional stability, family monthly earnings, education and extraversion. Implications The investors are taking decisions based on emotions but they also look for information before taking a decision. The stockbroking company may provide information about the investments, opinion about the stocks in which the customers can invest and continuous updates about the stock market happenings through relationship managers. The equity investment is mostly preferred by investors and among the discriminating variables, emotional stability and returns are more strongly correlated with equity. Any broking company must focus on helping customers to overcome their emotions while making a decision and should provide cost-benefit analysis information to the investors regarding the investment decisions to satisfy the most economic investors. The investors analyze the information and expect more returns to the risk taken. Advising the investors to diversify their investments in various industries is essential as the volatility will be spread across various industries and the investors can get their expected returns. The investment in commodities is less preferred by the investors. It is a less risky investment compared to equity. Educating the investors about the investment in commodities will be helpful to them. Conclusion The study reveals that a strong relationship exists between personality traits and the method of investment. The important trait that influences the investment is emotional stability. Every investor must control his emotions while taking decisions to avoid loss of money. Adequate information must be provided to the investors to avoid the volatility in the stock market prices. The study also helps in forecasting the stock prices on various investments and the market trend in future days. References 1. Barber Brad M and Odean Terrance (2000), Trading is Hazardous to Wealth: The Common Stock Investment Performance of Individual Investors, The Journal of Finance, Vol. LV, No. 2, pp. 773-806. 2. Grinblatt Mark, Titman Sheridan and Wermers Russ (1995), Momentum Investment Strategies, Portfolio Performance and Herding: A Study on Mutual Fund Behaviour, The American Economic Review, Vol. 85, No. 5, pp. 1088-1105. 3. Linden Dimitri van der, Nijenhuis Jan te and Bakke Arnold B (2010), The General Factor of Personality: A Meta-Analysis of Big Five Inter-Correlations and a CriterionRelated Validity Study, Journal of Research in Psychology, Vol. 44, No. 3, pp. 315-327. 4. Lodi-Smith Jennifer and Brent Roberts W (2007), Social Investment and Personality: A Meta-Analysis of the Relationship of Personality Traits to Investment in Work, Family,

Religion, and Volunteerism, Personality and Social Psychology Review, Vol. 11, No. 1, pp. 68-86. 5. Shapira Zur and Venezia Itzhak (2001), Patterns of Behaviour of Professionally Managed and Independent Investors, Journal of Banking and Finance, Vol. 25, No. 8, pp. 1573-1587. Websites 1. http://business.mapsofindia.com/investment-industry/top-10-investment-options.html 2. http://financial-education.com/category/behavioral-finance/ 3. http://www.allbusiness.com/company-activities-management/management-riskmanagement/11732687-1.html 4. http://www.barclayswealth.com/private-banking/products-services/investmentphilosophy/behavioural-finance.htm 5. http://www.blonnet.com/2010/07/22/stories/2010072253381200.htm 6. http://www.blonnet.com/iw/2010/08/01/stories/2010080150400900.htm 7. http://www.business-standard.com/india/news/fii-flows-remain-strong-in-2010/88277/on 8. http://www.capitalinternational.ca/action/KeysToInvesting?page= InvIPRecommendedReading 9. http://www.capitalinternational.ca/jsp/geistQ/CA/en/prepareData.jsp 10. http://www.indiabulls.com/ 11. http://www.indiabulls.com/securities/ 12. http://www.springerlink.com/content/ur175w7t46r03051/ 13. http://www.thehindubusinessline.com/2010/05/30/stories/ 2010053051810100.htm 14. http://www.tradingpicks.com/beginners_guide.htm 15. http://www.world-exchanges.org/files/file/stats%20and%20chartsJuly %202010%20WFE%20Market%20Highlights.pdf 16. http://www.yeahindia.com/c-india1.htm Reference # 36J-2011-06-03-01