Personality Traits Affect Financial Decisions

Personality Traits Affect Financial Decisions
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Personality Traits Affect Financial Decisions
The link between personality and financial decision-making is expected in psychology literature. The basic premise is that the dynamic organization and combination of qualities and traits that constitute an individual’s unique character can affect how they make financial decisions. Personality traits have been proven to underlie behavior; hence, it is feasible that they can also sway one’s economic inclinations. Indeed, an individual’s psychological systems affect how they respond to the environment and cope with challenges and lifestyle issues. Some people react emotionally, while others respond rationally to situations. Similarly, some people avoid risks while others willingly engage in risky activities. These variations are closely linked to personality qualities. In this paper, the author documents how personality traits influence financial behaviors. The general argument is that personality traits such as openness, conscientiousness, extraversion, agreeableness, and neuroticism affect financial decisions by shaping how people spend, save, invest, and plan financial actions.
Today, the Big Five Personality Traits model is the most commonly cited theory that links personality traits to financial decision-making, which maintains that five major personality traits influence human behavior. They include openness, Conscientiousness, extraversion, agreeableness, and neuroticism. These personality dimensions shape how individuals make specific life choices and, consequently, how they manage their money and investments (Brown & Taylor, 2014). (Brown, & Taylor, K., 2014). Connections between the Big Five personality traits and financial decision-making range from risk-taking behaviors to economic preferences, investment choices, and debt-related decisions.
Each dimension of the Big Five model has a unique bearing on fiscal actions. Conscientious individuals are very disciplined, trustworthy, and actively involved in decision-making. Rather than being superstitious, they make investments selectively after reflecting on their options (Nga & Ken Yien, 2013) (Nga, & Ken Yien, L., 2013). On the other hand, people with extraverted personality traits possess high-powered, jolly, and hubristic behavior. Therefore, they tend to select short-term investments (Nga & Ken Yien, 2013). (Nga, & Ken Yien, L., 2013). Agreeable people are very cooperative and selfless in group gatherings and social settings. This makes them very good at producing fair and reasonable decisions (Priyadharshini, 2020). Due to instability in emotions and high-stress levels, neurotic people are very impulsive and moody. This affects their willingness to take financial risks. Additionally, their impulsiveness causes sudden spending and investing behaviors.
The Big Five personality traits are predictors of financial behavior for various reasons (Xu et al., 2015). First, being able to plan, work hard, and have intense urges and drive is a personality trait that is important in financial management. These qualities are found in conscientious people (Xu et al., 2015). Second, the Big Five personality model categorized traits into five groups, making it easy to assign people to designated personality dimensions and make generalizations. Third, the model has been consistently tested and applied in psychological studies that involve economics. Each Big Five personality trait has been linked to broad financial outcomes. For example, all Big Five traits have been shown to predict salary levels (Xu et al., 2015). In a longitudinal study, people with neuroticism and agreeableness traits showed lower salary income, while those with conscientiousness, extraversion, and openness had moderately higher incomes.
The connection between the extraversion personality trait and financial management is vital, as seen in past studies (Brown, & Taylor, K., 2014). People who are more pessimistic about their future and retirement tend to save more money and manage their expenses. A study has suggested that the conscientiousness personality trait is correlated with unsecured debt, and an individual with this personality type is less likely to have any debt (Brown, & Taylor, K., 2014). Moreover, conscientiousness was associated with higher levels of wealth accumulation in a Health and Retirement Study (Xu et al., 2015). Individuals with concise personality traits are known to gain employment faster than those with neuroticism, who have shown higher unemployment rates.
Individuals who are more social, outgoing, and energetic are more linked with unsecured debt such as stocks and shares. Extraverted and conscientious individuals are less likely to be in financial distress, whereas those with agreeable and open personality traits are more linked to financial distress. This is because they tend to try new opportunities and make recent financial decisions that might not be beneficial in the long run.
Extraversion is quite synonymous with happiness, success, and social ease. However, a familiar counterpoint could be the other side of this personality trait which entails impulsivity, excitement, recklessness, overconfidence, and poor tolerance of monotony and boredom. In a survey of 121 people, about 64% of the participants were extroverts with a high overconfident score. There were other common traits within the group, such as loss aversion and avoidance of the status quo. Overconfidence is considered to be a warning against proper reasoning and decision-making. Thus, it may constrain cognitive abilities and sense. Overconfident people may overestimate their skills and suffer adverse consequences due to their overconfidence. Sometimes, people with extrovert personality traits need more attention from their surroundings, which might cause them to make decisions that may not be financially sound.
The Big Five Theory is one of many personality theories that links link individual traits to financial orientation. Approaches such as prospect theory have also attracted attention from scholars for attempting to associate personalities and financial decision-making. Indeed, prospect theory has become one of the most used tools in behavioral finance because it exposes various biases that influence financial decision-makers when faced with risky situations (Passarelli & Del Ponte, 2020)s (Passarelli & Del Ponte, 2020). The central claim of this theory is that people consider changes in well-being and wealth rather than taking into account the final financial outcomes. This means that people are inclined to evaluate differences to changes using a reference point instead of considering an absolute magnitude.
The prospective theory postulates that individuals are risk-seeking concerning losses and risk-averse with reference to gains. Therefore, the value is significantly different when one considers the reference point. The context of an individual’s situation dictates the reference point. Additionally, the stimuli an individual perceives in relation to their reference point are fundamental in their financial judgments (De Bortoli et al., 2019) (De Bortoli et al., 2019). If the level of wealth one individual has is great, they may approach financially risky situations differently. By the same token, if one feels that their wealth is limited, they may divert their financial decisions in another direction. Ultimately, this means that value in fiscal decision-making is more attached to losses and gains than eventual financial outcomes.
In following the Prospect theory, it is safe to say that the value function of a financial decision is marked by the following attributes: (1) that the manner one views gains and losses matters, (2) that the value of a financial action is determined by a particular reference point which is dependent upon an individual’s perception (Sokol-Hessner & Rutledge, 2019) (Sokol-Hessner & Rutledge, R. B. (2019). Concepts of loss aversion emanate from the value of a decision. People view a loss as more painful than the pleasure and contentment obtained from an equivalent gain. Hence, people are risk-averse when they perceive a potential loss and will only accept risks if they fail to realize the possible loss.
Personality traits may not permanently be fixed, meaning one’s personality trait may not have a distinct effect on how one makes financial decisions. Notably, many factors impact adult personality development and financial decision-making, such as family structure, health, parental education, and mathematical abilities in adolescence (Xu et al., 2015) (Xu et al., 2015). The neuroticism and conscientiousness personality traits have a significant impact on the wealth and salary of an individual. These two personalities are the main predictor...