The Effect of Personality Traits on Cognitive Investment Biases

Abstract

The purpose of this research is to assess the impact of personality factors on an investor's financial decision-making particularly those related to cognitive biases. The understanding of behavioral biases among investors holds the key to identifying an investors' propensity to making irrational and illogical decisions. Our research examined an investors' behavioral orientation and their propensity towards cognitive biases in financial decision-making. Our research took place in two stages. In the first stage, we identified predominant cognitive biases among investors using an extensive review of existing research. We further prepared instruments to measure the cognitive biases for which we conducted exploratory factor analysis followed by confirmatory factor analysis. In the second stage, we used the 16pf instrument developed by Cattell to identify whether there exists a relationship between the personality of an investor and his propensity to have an inclination towards a particular cognitive behavioral bias and we identified some key relationships. Our research showed some interesting trends. We observed that most of the cognitive biases were related to particular personality traits namely, abstractedness, reasoning, emotional, stability, dominance and openness to change. Thus, for investment advisors and policy makers, if an investor demonstrates these personality traits, one can conclude that the investor may be more likely to have an inclination to have cognitive biases in investment decision making.