Does personality drive price bubbles?

Abstract

Purpose The purpose of this study is to analyze whether differences in market-wide levels of investor personality influence experimental asset market outcomes in terms of limit orders, price levels and price bubbles. Design/methodology/approach Investor personality is determined by a questionnaire. These data are combined with data from 17 experimental asset markets. Two approaches are used to estimate market-wide levels of investor personality. First, the market-wide average of each personality trait is determined; second, the percentage of individuals with comparable personality in a market is computed. Overall, 364 undergraduate business students participated in the questionnaire and the experimental asset markets. Findings Limits and transaction prices are higher in markets with higher mean values in participants’ extraversion and openness to experience and lower mean values in participants’ agreeableness and neuroticism. In markets with lower mean values of subjects’ openness to experiences more overpriced transactions are observed. In markets with a higher proportion of extraverted subjects and a lower proportion of neurotic subjects higher limits and transaction prices are observed. Bubble phases last longer in markets with a higher proportion of extraverted and a lower proportion of neurotic subjects. Originality/value Overall, the findings suggest that market-wide personality levels influence market outcomes. As a consequence, market-wide levels of personality help to explain prices in auctions with limited number of participants. Additionally, studies that analyze the influence of subjects’ characteristics, including risk aversion, emotional states or overconfidence, on market outcomes should also consider personality traits as potential underlying factor.

The relationship between psychopathy and financial risk and time preferences

“…The findings in this paper show that the psychopathy trait plays an important role in financial decision-making. Our results add to the growing literature that personality traits (in our case, abnormal traits) drive many investment choices (Chitra and Sreedevi, 2011; Conlin et al , 2015), stock market performance (Durand et al , 2008), the disposition effect (Durand et al , 2013a), overconfidence (Durand et al , 2013b), risk aversion (Filbeck et al , 2005), loss aversion (Durand et al , 2019), trading behavior (Durand et al , 2008; Durand et al , 2013a; Tauni et al , 2017; Oehler et al , 2018; Oehler et al , 2019), risk tolerance (Wong and Carducci, 2016) and financial delinquency (Parise and Peijnenburg, 2017). In focusing only on psychopathic traits in the current analysis, we leave the question of how other psychological models might relate to the variables modeled in this paper for future research.…”

The relationship of extraversion and neuroticism with risk attitude, risk perception, and return expectations.

“…Another reason is that, contrary to the other personality traits, extraversion and neuroticism are strongly connected with emotional states (Costa & McCrae, 1980; Larsen & Ketelaar, 1989), locus of control (Kovaleva, Beierlein, Kemper, & Rammstedt, 2012; Morris & Carden, 1981; Oehler, Wendt, Wedlich, & Horn, 2017), and cognition, that is, information processing in the form of focusing on positive and negative information (Noguchi, Gohm, & Dalsky, 2006) that largely influences individuals’ risk-taking behavior (Forgas, 1995; Grable & Roszkowski, 2008; Isen & Patrick, 1982; Karlsson, Loewenstein, & Seppi, 2009; McInish, 1980; Slovic, 1972). Moreover, it is shown that investors’ degree of extraversion and neuroticism both at the individual and the market-wide level has an impact on individual trading behavior and market outcomes in terms of price bubbles and levels (Oehler, Wedlich, Wendt, & Horn, 2016). This leads us to assume that extraversion and neuroticism are both important factors that influence the determinants of risk-taking.…”

Behavioral economics and finance: a selective review of models, methods and tools

“…Some of the most popular include overconfidence, overreaction, underreaction, wishful thinking, procrastination, anchoring and myopia (Ramiah et al, 2015;Frydman and Camerer, 2016;Liu and Tan, 2021;Kleine et al, 2022). In approaching investors' behavior, it is also important to account for the different personalities of investors, which surely determine the direction and intensity of the observed biases (Kleine et al, 2016(Kleine et al, , 2020(Kleine et al, , 2021De Bortoli et al, 2019;Gambetti and Giusberti, 2019;Oehler et al, 2021).…”