Behavioral Finance: A Study of Correlation Between Personality Traits with the Investment Patterns in the Stock Market

Abstract

Conventional theories are based on the assumption that investors are rational beings. All their decisions are logical and judgments fair and rational. Based on this assumption, they have derived all their fi nancial models. The capital asset pricing model assumes that investors are rational beings and they have the same expectations. This assumption contradicts behavioral theories, which assume that investors under uncertainty behave in a not-so-rational or irrational manner. The phenomenon of behavioral fi nance was noticed post-2000, when IT bubble was built up and fi nally busted. During this time period, investors showed herd mentality, and they preferably invested in companies having ".com" attached to them. The market prices of IT companies rose much above their intrinsic value or fair value. It also happened in the subprime crisis when real estate prices in the USA started rising much above their fair value. After a certain time period, the bubble collapsed leading to the fall of stock prices, wiping off the hard-earned money of investors. The history of irrational behavior can be traced to the sixteenth century in Holland. The tulip bulbs were imported to Holland from Constantinople. These bulbs became very popular with Dutch elite class. Trading of these bulbs started on major stock exchanges in Europe. The prices rose to great heights and people started trading in bulbs in a big way. After a certain time period, people started selling these bulbs and the prices began falling. People started defaulting on their tulip contracts. This bubble fi nally collapsed leading to huge losses. Therefore, it was realized that there was something which these conventional models were unable to explain. These softer issues were never addressed and recognized by traditional theorist before. It was Kahnman and Smith who for the fi rst time brought insights from behavioral sciences into the fi eld of fi nance and economics. They stated that under uncertainty

The Impact of the Big Five Traits and Mood on Investment Performance A Study of Individual Investors in Vietnam.

“…CONOPEN positively influences while agreeableness negatively affects investment performance. Generally, these consequences are similar to the research findings of Rizvi and Fatima (2015), and Nga and Yien (2013). Apparently, when making a decision on investing, investors whose personality is prone to CONOPEN produce a good result in which the return rate they achieved is as expected, and higher than previous periods as well as their satisfaction with investment decisions.…”

“…Particularly, investors are recommended to pay attention to personality traits and moods that contribute to influence on investment performance because Schwager (1993, p.49) emphasizes that "trading is emotion" and "it is mass psychology, greed and fear". Recent financial research has also shown that investors' personality is correlated to stock market investment (Cooper et al, 2000;Gherzi et al, 2014;Rizvi & Fatima, 2015) and mood takes a vital position in financial investment, even in decisions under risk and/or uncertainty (Loewenstein et al, 2001;Shu, 2010;Fenton-O'Creevy et al, 2011;Harding & He, 2015;Lepori, 2015). Apparently, there is an effect of personality traits or moods on investment performance.…”

Personality Traits, Perceived Risk, Uncertainty, and Investment Performance in Vietnam

“…Conscientiousness significantly affected investment performance. Generally, these consequences are similar to the research findings of Rizvi and Fatima (2015), and Nga and Yien (2013). Apparently, for investors possessing Conscientiousness, the more they do things efficiently, do a thorough job, plan and follow through with them, the higher their investment performance is.…”

“…More specifically, their investment results are better than expected, has a high degree of safety, has lower risk compared to the market in general, has high rates of earnings growth in the past 5-10 years, has higher than average earnings projections for the next several years, and proceeds of stocks sales will be used in a way that they find productive. Notably, Rizvi and Fatima (2015) stated that all personality traits of the Big Five fully affected stock market investment in India, while Agreeableness had no direct impact on investment performance in Vietnam. These different results need to have further projects conducted and completed to validate more accurate conclusions.…”

“…Caligiuri and Tarique (2012) There are many studies involved in this relationship. Rizvi and Fatima (2015) studied the relationship between personality traits and the stock investment by making online survey to 100 investors trading or not trading in the Indian stock market. Results showed that age group (18-28 and 29-39 ages), gender (dominant male), number of dependents, income level, extraversion, agreeableness, conscientiousness, neuroticism and openness personality dimension had significant impact on stock market investment.…”