Emotional Instability and Financial Decisions: How Neuroticism Fuels Panic Selling

Abstract

This study investigates the relationship between neuroticism and panic-selling behavior among investors, particularly during market downturns. Building on the theoretical framework of behavioral finance, we hypothesize that higher levels of neuroticism are positively associated with an increased likelihood of panic selling. The data for this research were derived from a comprehensive survey titled Survey on Life and Money, which was conducted by Rakuten Securities in collaboration with Hiroshima University in November and December 2023, with a total sample size of 189,524 participants. Our results reveal that 9.46% of the respondents fully or partially panic-sold their stocks during market volatility. Additionally, the respondents demonstrated a tendency toward neuroticism, with an average score of 2.95 out of 5 on the neuroticism scale. Using a probit regression analysis, we examined the dependent variable of panic selling in relation to neuroticism as the independent variable, controlling for various demographic, socioeconomic, and behavioral characteristics. Our findings robustly support this hypothesis, indicating that individuals with higher neuroticism scores are more likely to engage in panic selling during periods of market volatility, with significance at the 5% level. This study contributes to the behavioral finance literature by highlighting the significant role of personality traits in investment decision making and underscores the importance of understanding investor psychology in financial markets. This study emphasizes the need for a nuanced understanding of how individual psychological factors, particularly neuroticism, drive market behavior and influence broader economic stability.