Academic study considers how personality traits affect financial outcomes
Advice and experience may influence financial decision making but a new study says that financial advisors (FAs) should also consider clients’ personality types.
The ‘big five’ personality types - openness, conscientiousness, extroversion, agreeableness, and neuroticism (OCEAN) – were the basis for a University of Georgia (UGA) team’s study into how combinations of these affect financial outcomes.
Personality types and behavioural biases are increasingly part of the finance industry, such as BMO GAM’s ESG tool which was launched earlier this year.
The UGA team’s research was led by Jim Exley, a PhD psychology student who was interested in the topic after 25 years in the financial services industry where he encountered individuals’ differing approaches to their finances.
“The industry requires us to measure this thing called risk, but I was talking to people and understood that there's more to somebody's financial life than just their risk tolerance,” he said.
The study
Exley and the team asked 395 participants about personality, financial risk tolerance, net worth, and happiness.
The researchers identified three distinct personality profiles - Resilient, Over Controlled and Under Controlled - that are associated with risk-taking and money management behaviours.
The largest cohort were the Over Controlled who exhibited high agreeableness and conscientiousness, but low extroversion. This risk-averse group are less likely to invest in the stock market, even though they may understand that it could grow their wealth.
Conversely, the Under Controlled group are less conscientious, and more extroverted and neurotic may take too many risks.
The Resilient group are extroverted, open and agreeable, and not very neurotic. They take risks, but not too many and may therefore produce the best financial outcomes.
Takeaways for FAs
What does all these mean for FAs?
W. Keith Campbell, professor of psychology in UGA’s Franklin College of Arts and Sciences, who first suggested to Exley that he consider personality traits in his research, says it’s still relatively uncommon to explore the psychology behind the finances themselves.
“It's really interdisciplinary work,” he said. “It's taking very basic models of personality, together with sophisticated statistics on psychometric approaches, and then applying them to very basic questions about investing and finance.”
Exley added that financial planners should look at the OCEAN traits to better help clients.
“If people easily can talk about themselves—and it's telling you a lot about how they handle money—then practitioners simply need to measure it and record it,” he said.
Full study:
https://www.sciencedirect.com/science/article/pii/S0191886921006796?via%3Dihub
