Personality traits and impact on Behavioural biases of financial professionals

Author: Dr. Sujata Kapoor

(Source: https://www.teachpe.com/sports-psychology/personality-individual-differences)

As a financial planner or advisor one needs to understand the clients’ investment objectives, his risk perception, and tolerance clearly and carefully. A sophisticated financial professional is expected to make informed decisions, and this is possible only if he is rational decision-maker. The real challenge is to measure their rationality which can be impacted by their behavioural characteristics like personality. Extant researches have shown a relationship between personality traits, behavioural biases, and trading pattern of investors (Durand et al., 2008; Yang et al.,2012; Tauni et al.,2018), and different personality traits are responsible for different types of behavioural biases in decision making. Researchers for long have been trying to explore how personality traits influence individual behavioural biases and subsequent decision making. It is furthermore important to know the personality types and its impact on behavioural biases of financial professionals. Figure -1 describes Big five personality traits.

Big five Personality Traits

A combination of distinctive cognitive and emotional characteristics which influence the behaviour of a person and the way he/she responds to others is known as personality traits. Costa and McCrae (1992) defined five types of personality traits namely Extraversion, Openness, Agreeableness, Conscientiousness, and Neuroticism. 

Figure 1: Big five personality traits, Costa and McCrae (1992)
Baker et al.  (2017) classify sophisticated financial professionals as financial planners and advisors, financial analysts and portfolio managers, and institutional investors. All types of financial professionals exhibit behavioural biases but the intensity of a specific bias depends on their perception, personality, and level of sophistication. Investors’ decisions are based on heuristics (Kahneman and Tversky,1979) and affected by cognitive and emotional errors known as behavioural biases. The prominent behavioural biases among financial professionals are overconfidence bias, anchoring heuristic, availability heuristic, herding behaviour, home bias and hindsight bias (Baker et al.,2017; Skiba and Skiba,2017; Ahmad et al. ,2017; Aren et al.,2016). Behavioural biases influence the decision making of all types of investors and sophisticated financial professionals are no different. They also make irrational decisions. Their decisions can impact not only their own performance and of the firm for which they are working. They exercise a considerable influence on investors’ (clients’) trading, hence it is required to carefully look at the characteristics and behaviour of these experts to understand their decision-making process. One important characteristic as stated earlier is their personality.  The personality of financial professionals plays a big role in convincing and maintaining their client base. Renowned researchers find that distinctive personality traits may stimulate behavioural bias differently.  

 Extant studies have proved the influence of financial professionals’ demographics such as age, gender, financial education, and experience on their financial advices and investors’ trading behaviour. Investors (clients) find young and highly experienced expert more sophisticated and follow their advice. Smiling, energetic and confident face of advisor increases the stock trading by investors. On the other hand, emotional, short-tempered, and doubtful advisors affect clients’ investment, trading, and performance. Yang et al. (2012) describe that an extrovert and conscientious advisor brings more confidence to investors that leads to high trading volume. Durand et al.  (2008) state that extraversion and agreeableness personality traits intensify disposition effect and overconfidence among Australian investors.

Distinct personality traits of individual bring variations in the magnitude of behavioural biases (Mayfield et al. 2008).  Extant researches focus majorly on personality traits and decision making of individual investors. Personality traits of financial professionals are less explored and can provide innovative insights to understand their psychological traps, cognitive and emotional errors in the decision-making process. Therefore, extensive research is warranted on this dimension to bring more clarity about the impact of attitude and behaviour of financial professionals in investment decision making

References:

·         Ahmad, Z., Ibrahim, H., & Tuyon, J. (2017). Institutional investor behavioral biases: syntheses of theory and evidence. Management Research Review, 578-603.

·          Aren, S., Aydemir, S. D., & Şehitoğlu, Y. (2016). Behavioral biases on institutional investors: a literature review. Kybernetes, 45(10), 1668-1684

·         Baker, H. K., Filbeck, G., & Ricciardi, V. (2017). How Behavioural Biases Affect Finance Professionals. The European Financial Review, 25-29.

·         Costa, P. T., Jr., & McCrae, R. R. (1992). Revised NEO Personality Inventory (NEO-PI-R) and NEO Five Factor Inventory (NEO-FFI) professional manual. Odessa, FL: Psychological Assessment Resources.

·         Durand, R.B., Newby, R. and Sanghani, J. (2008), “An intimate portrait of the individual investor”, The Journal of Behavioral Finance, Vol. 9 No. 4, pp. 193-208.

·         Kahneman, D., & Tversky, A. (1979). Prospect theory: an analysis of decision under risk. Econometrica, 47 No. 2, 263-291.

·         Mayfield, C., Perdue, G., & Wooten, K. (2008). Investment management and personality type. Financial services review, 17(3), 219-236.

·         Skiba, A., & Skiba, H. (2017). Institutional Investors. Financial Behavior: Players, Services, Products, and Markets. New York: Oxford University Press, 64-78.

• ·             Tauni, M. Z., Majeed, M. A., Mirza, S. S., Yousaf, S., & Jebran, K. (2018). Moderating influence of advisor personality on the association between financial advice and investor stock trading behavior. International Journal of Bank Marketing.
• ·             Yang, S., Hsu, Y. and Tu, C. (2012), “How do traders influence investors’ confidence and trading volume? A dyad study in the future’s market”, Emerging Markets Finance and Trade, Vol. 48, Sup 3, pp. 23-34. 

Dr Sujata Kapoor is a co-author of the book 'Behavioural Finance'.

You can check out the book here