Life would be dull if we all looked the same
The issue of self-control is important and potentially extremely beneficial if investors are aware of both the pitfalls they are prone to through irrational decision making, and the requirement for greater self-control.
In the previous chapter, we saw that some demographic groups are more likely to desire financial discipline and control than others. Our survey also looked at whether certain personality traits, in particular traits that are known to have an effect on our investment behaviour, also help to identify those who need and desire greater financial discipline.
Residents of the United States, please read this important information before proceeding
Please read this important information before proceeding.
Understanding our Personalities
Through this study and our previous work, we have found three elements of our personalities (personality dimensions) that are particularly relevant for assessing individuals’ needs and desires for self-control over their finances:
Financial Risk Tolerance
This is a standard personality dimension that helps to determine the appropriate trade-off between risk and return for the individual investor. In our survey, we measure risk tolerance with the following statements:
- "In order to achieve high returns I am willing to choose high risk investments."
- "I am a financial risk taker."
(Note that a thorough measure of Financial Risk Tolerance requires us to use more questions than this; the Barclays measure uses a further six questions.)
This second personality trait is based on the tendency towards stress and heightened emotions. This composure scale (part of our Financial Personality Assessment) is based on one of the five main dimensions of personality psychology and was assessed with the strongest predictor of this dimension: "I get stressed easily."
Promotion vs. Prevention
The third personality trait is based on psychological research into two distinct motivations for doing things. People tend to either be motivated to make good things happen (promotion focus) or to prevent bad things from happening (prevention focus). A promotion focus is concerned with advancement, approach, and accomplishment, whereas a prevention focus is concerned with security, safety, and responsibility. We measured this motivation with the statement: "I am more concerned with preventing bad things happening than ensuring good things happen."
Survey questions asked high net worth individuals worldwide to state their agreement with each statement in order to group respondents based on their openness to risk, level of composure, and promotion versus prevention focus. Chart 7 shows levels of agreement with each statement.
The survey data in Chart 7 shows that there is roughly an equal number of people with high and low agreement with each of our personality statements, confirming the wide range of personality types across global respondents.
Individual Personality Differences
Analysis of personality traits starts to become particularly useful when we look at their relationship with some of the trading behaviours discussed in the previous chapter and the respondents' desire for greater financial discipline. As Dr. Peter
Ayton, Professor of Psychology at City University, confirms: "Emotions interacting with (personality) traits could be quite a significant cause of apparent instability in what people do with their money."
Our findings show that some personality types are more prone to failures of control than others. Using the trading paradox example as a failure of control we see that the presence of some personality traits is likely to leave individuals prone to frequent trading. This was particularly the case for those who:
- Have low composure (i.e. are stressed easily)
- Have a prevention focus (i.e. are more concerned with preventing bad things from happening).
- Have a high appetite for risk.
Each of these personality traits are associated with the likelihood of trading too much, as can be seen in the Chart 8. The profile of the frequent trader is that of a risk taker that is stressed easily, yet wary that he or she may be doing something wrong.