The effect of personality traits on investment decisions with the mediating role of risk tolerance

Subject Areas : Investments

Arezou Pouresgandar Raziabad ¹ , Alireza Fazlzadeh ² , Vahid Ahmadian ³ , Sajad Naghdi ⁴

1 - Department of Economics, Management and Accounting, University of Tabriz, Tabriz, Iran.
2 - Department of Economics, Management and Accounting, University of Tabriz, Tabriz, Iran.
3 - Department of Economics, Management and Accounting, University of Tabriz, Tabriz, Iran.
4 - Department of Economics, Management and Accounting, University of Tabriz, Tabriz, Iran.

Received: 2024-03-08 Accepted : 2024-05-08 Published : 2024-05-08

Keywords: Behavioral Finance, Investment Decisions, Personality Traits, Risk Tolerance,

Abstract :

Purpose: The aim of this research was to investigate the effect of personality traits on investment decisions with the mediating role of risk tolerance in the Tehran Stock Exchange. Research Methodology: This research was conducted in 2022 and is of an applied nature, employing a descriptive-survey methodology. The statistical population of this research includes all individual investors in the Tehran Stock Exchange. The sample size in this study is 386 individuals. Data collection was carried out using a standard Likert scale questionnaire. The validity of the questionnaire was confirmed through content validity, and its reliability was verified using Cronbach's alpha. Data analysis was performed using Structural Equation Modeling (SEM) with the Partial Least Squares (PLS) approach, facilitated by SPSS and SMARTPLS software. Findings: The results showed that personality traits significantly affect investment decisions and risk tolerance. Furthermore, risk tolerance significantly impacts investment decisions and mediates the relationship between personality traits and investment decisions. Originality / Value: The scientific contribution of this research lies in using risk tolerance as a mediating variable to examine the effect of personality traits on investment decisions. Additionally, the use of structural modeling with the Partial Least Squares approach, aided by SMARTPLS software, is highlighted.

References:

Akhtar F. & Das N. (2020). Investor personality and investment performance: from the perspective of psychological traits. Qualitative Research in Financial Markets 12(3) 333-352.

Allport G. W. (1937). Personality A Psychological Interpretation. In Internet Archive.

Alsabban S. & Alarfaj O. (2020). An empirical analysis of behavioral financr in the saudi stock market: evidence of overconfidence behavior. International Journal of Economics and Financial Issues 10(1) 73–86.

Asgharzadeh M. & Jahanbakhsh M. T. (2013). The role of personality traits in personal security with emphasis on the five-factor model. Amniat Pajouhi 11(40) 119-132. [In Persian]

Ashari E. Khodabakhsh R. & Khomami S. (2022). Personality Traits Emotional Intelligence of Investors and Their Risk Tolerance. Accounting and Auditing Studies 11(43) 105-120. [In Persian]

Bairagi P. & Chakraborty A. (2021). Influence of Risk -Perception on Retail Investors’ Decision Making. SSRN Electronic Journal.

Baron R. M. & Kenny D. A. (1986). The moderator–mediator variable distinction in social psychological research: Conceptual strategic and statistical considerations. Journal of Personality and Social Psychology 51(6) 1173–1182.

Cattell R. B. (1943). The description of personality: basic traits resolved into clusters. The Journal of Abnormal and Social Psychology 38(4) 476–506.

Chitra K. & Sreedevi V. R. (2011). Does Personality Traits Influence the Choice of Investment? IUP Journal of Behavioral Finance 8(2) 47-57.

Cronbach L. J. (1951). Coefficient Alpha and the Internal Structure of Tests. Psychometrika 16(3) 297–334.

De Bortoli D. Da Costa N. Goulart M. & Campara J. (2019). Personality traits and investor profile analysis: A behavioral finance study. PLOS ONE 14(3) e0214062.

Dervishaj B. & Çakërri L. (2022). A Study of the Determinance of the Type of Personality in Albanian Individual Investor Decision-Making. European Journal of Business and Management Research 7(3) 364–376.

Dhiman B. & Raheja S. (2018). Do Personality Traits and Emotional Intelligence of Investors Determine Their Risk Tolerance? Management and Labour Studies 43(1-2) 88–99.

Doustar M. Ramazanpour E. & Javadian Lang M. (2014). Investigating the effect of investors' personality characteristics on their risk tolerance in Tehran Stock Exchange. The third national accounting and management conference. [In Persian]

Durand R. B. Fung L. & Limkriangkrai M. (2019). Myopic Loss Aversion Personality and Gender. Journal of Behavioral Finance 20(3) 339–353.

Durand R. B. Newby R. & Sanghani J. (2008). An Intimate Portrait of the Individual Investor. Journal of Behavioral Finance 9(4) 193–208.

Durand R. B. Newby R. Peggs L. & Siekierka M. (2013). Personality. Journal of Behavioral Finance 14(2) 116–133.

Durand R. Newby R. Tant K. & Trepongkaruna S. (2013). Overconfidence overreaction and personality. Review of Behavioural Finance 5(2) 104–133.

Ebrahimi Lifshagard A. Pakizeh K. & Raisifar K. (2019). Exploring the effect of investors' personality on their investment performance with mediating role of heuristic biases. Financial Knowledge of Securities Analysis 12(42) 107-128. [In Persian]

Eysenck H. J. (1947). Dimensions of Personality. Transaction Publishers.

Fama E. F. (1970). Efficient Capital Markets: a Review of Theory and Empirical Work. The Journal of Finance 25(2) 383–417.

Farhadi Sharif Abad M. & Doaei M. (2022). Modeling investor tendencies with emphasis on psychological factors by fuzzy Delphi and DEMATEL methods. Advances in Finance and Investment 2(5) 113-144. [In Persian]

Fornell C. & Larcker D. F. (1981). Evaluating structural equation models with unobservable variables and measurement error. Journal of Marketing Research 18(1) 39–50.

Geisser S. (1975). The Predictive Sample Reuse Method with Applications. Journal of the American Statistical Association 70(350) 320–328.

Goldberg L. R. (1981). Language and individual differences: The search for universals in personality lexicons. Review of personality and social psychology 2(1) 141-165.

Hair J. Black W. Babin B. Anderson R. & Tatham R. (2006) Multivariate Data Analysis. Amazon.

Jalilvand A. Rostami Noroozabad M. & Rahmani S. (2016). Recent Evidence on Investors’ Behavior in the Tehran Stock Exchange: Preliminary Evidence and Future Insights. Financial Research Journal 18(1) 95-125. [In Persian]

Jiang Z. Peng C. & Yan H. (2024). Personality differences and investment decision-making. Journal of Financial Economics 153 103776.

Kleine J. Wagner N. & Weller T. (2016). Openness endangers your wealth: Noise trading and the big five. Finance Research Letters 16 239–247.

Kubilay B. & Bayrakdaroglu A. (2016). An Empirical Research on Investor Biases in Financial Decision-Making Financial Risk Tolerance and Financial Personality. International Journal of Financial Research 7(2) 171-182.

Larisemnani B. & Dehkhoda A. (2020). Investigating the Impact of Mood on the Behavioral Finance Trap of Investors in Tehran Stock Exchange. Financial Management Perspective 10(30) 143-162. [In Persian]

Lin H. W. (2011). Elucidating rational investment decisions and behavioral biases: Evidence from the Taiwanese stock market. African Journal of Business Management 5(5) 1630–1641.

Lin H. W. & Lu H. F. (2015). Elucidating the association of sports lottery bettors’ socio-demographics personality traits risk tolerance and behavioural biases. Personality and Individual Differences 73 118–126.

Markowitz H. (1952). Portfolio Selection. The Journal of Finance 7(1) 77–91.

McGhee R. L. Ehrler D. J. Buckhalt J. A. & Phillips C. (2012). The Relation between Five-Factor Personality Traits and Risk-Taking Behavior in Preadolescents. Psychology 3(8) 558–561.

Mirbozorgi. S. P. Hematfar M. & Janani M. (2022). Explaining the Appropriate Model of Investors Risk Power Based on Personality Characteristics. Financial Accounting and Auditing Research 14(53) 135-162. [In Persian]

Mirhasheminasab S. A. Mohamadzadeh A. Mohammadnoorbakhsh Langaroodi M. & Akhoondi N. (2019). A Model for Syntactic Investigation between Risk taking Personal and Cultural properties on Herding Behavior in Tehran Stock Exchange. Financial Management Perspective 9(28) 65-90. [In Persian]

Moradi M. Aminzadegan S. & Marandi Z. (2018). The Role of Individual and Behavioral Characteristics On Demand for Financial Services. Journal of Investment Knowledge 7(25) 149-164. [In Persian]

<

Nandan T. & Saurabh K. (2016). Big-five personality traits financial risk attitude and investment intentions: study on Generation Y. International Journal of Business Forecasting and Marketing Intelligence, 2(2), 128-150.

Nareswari N. Rahmani C. W. & Negoro N. P. (2021). The Impact of Personality Traits on Perceived Investment Performance: The Moderating Role of Social Interaction. Jurnal Manajemen Teori Dan Terapan | Journal of Theory and Applied Management, 14(1), 1-15.

Nategh Golestan A. & Zeinabi N. (2021). The Impact of Personality Characteristics on Risk Perception of stock exchange Investors; Analyzing the Risk Intermediation Role. Advances in Finance and Investment, 2(4), 33-54. [In Persian]

Nazari Fahandari. A. (2020). The effect of emotional intelligence on investment decisions considering the mediating role of financial literacy and risk tolerance of active investors in the capital market. The 7th National Conference of Modern Studies and Researches in the Field of Humanities Management and Entrepreneurship in Iran. [In Persian]

Nga J. K. H. & Ken Yien L. (2013). The influence of personality trait and demographics on financial decision making among Generation Y. Young Consumers, 14(3), 230–243.

Norman W. T. (1963). Toward an adequate taxonomy of personality attributes: Replicated factor structure in peer nomination personality ratings. The Journal of Abnormal and Social Psychology, 66(6), 574–583.

Oehler A. Wendt S. Wedlich F. & Horn M. (2017). Investors’ Personality Influences Investment Decisions: Experimental Evidence on Extraversion and Neuroticism. Journal of Behavioral Finance, 19(1), 30–48.

Pak O. & Mahmood M. (2015). Impact of personality on risk tolerance and investment decisions: A study on potential investors of Kazakhstan. International Journal of Commerce and Management, 25(4), 370–384.

Pashootanizadeh H. Ranaei Kordshouli H. Abbasi A. & Moosavihaghighi M. H. (2020). Simulation the Model of Effects of Behavioral and Macroeconomic Factors on the Tehran Stock Exchange Index with Using System Dynamics Approach. Financial Management Perspective, 10(29), 89-124. [In Persian]

Patterson F. M. & Daigler R. T. (2014). The abnormal psychology of investment performance. Review of Financial Economics, 23(2), 55–63.

Perveen N. Ahmad A. Usman M. & Liaqat F. (2020). Study of Investment Decisions and Personal Characteristics through Risk Tolerance: Moderating Role of Investment Experience. Revista Amazonia Investiga, 9(34), 57–68.

Rai K. Gupta A. & Tyagi A. (2021). Personality Traits Leads to Investor’s Financial Risk Tolerance: A Structural Equation Modelling Approach. Management and Labour Studies, 46(4), 422–437.

Rodrigues C. G. & B. V G. (2024). Financial risk tolerance of individuals from the lens of big five personality traits – a multigenerational perspective. Studies in Economics and Finance, 41(1), 88-101.

Sadiq M. & Amna H. (2019). Impact of Personality Traits on Risk Tolerance and Investors’ Decision Making. International Journal of Applied Behavioral Economics, 8(1), 1–20.

Shanmugam K. Chidambaram V. & Parayitam S. (2022). Relationship Between Big-Five Personality Traits Financial Literacy and Risk Propensity: Evidence from India. IIM Kozhikode Society & Management Review, 12(1), 85-101.

Sitkin S. B. & Pablo A. L. (1992). Reconceptualizing the Determinants of Risk Behavior. Academy of Management Review, 17(1), 9–38.

Stone M. (1974). Cross-Validatory Choice and Assessment of Statistical Predictions. Journal of the Royal Statistical Society: Series B (Methodological), 36(2), 111–133.

Tauni M. Z. Fang H. X. Rao Z.-R. & Yousaf S. (2015). The influence of Investor personality traits on information acquisition and trading behavior: Evidence from Chinese futures exchange. Personality and Individual Differences, 87, 248–255.

Tauni M. Z. Rao Z. R. Fang H. Mirza S. S. Memon Z. A. & Jebran K. (2017). Do investor’s Big Five personality traits influence the association between information acquisition and stock trading behavior? China Finance Review International, 7(4), 450–477.

Tenenhaus M. Vinzi V. E. Chatelin Y.-M. & Lauro C. (2005). PLS path modeling. Computational Statistics & Data Analysis, 48(1), 159–205.