Abstract
To date, the main source of inspiration for behavioral finance scholars has
been cognitive psychology. Cognitive psychology offers a rich set of insights into
human decision-making, and the biases that tend to influence it. Such biases
provide important reasons as to why anomalies may characterize financial market
behavior. This study builds on this tradition by merging in insights from yet
another psychology sub-discipline: personality psychology. We argue that a human
being’s personality is a key determinant of her behavior and performance. We
illustrate, for a limited subset of six personality traits (locus of control, maximizing
tendency, regret disposition, self-monitoring, sensation seeking and type-A/B
behavior), how this logic can be applied in the context of the study of trader
behavior and performance. We explore this line of reasoning in an illustrative asset
market experiment, involving 34 economics students. The results suggest that
different personality traits affect distinct components of trading behavior, and so
trading performance. In particular, more relaxed types who are more susceptible
to regret trade less frequently (a performance enhancing strategy). Impatient,
urgency-driven types with low sensitivity for environmental cues tend towards the
disadvantageous price-taker role (accepting limit orders posted by other traders)
and exhibit a lower tendency towards exploiting arbitrage opportunities.
been cognitive psychology. Cognitive psychology offers a rich set of insights into
human decision-making, and the biases that tend to influence it. Such biases
provide important reasons as to why anomalies may characterize financial market
behavior. This study builds on this tradition by merging in insights from yet
another psychology sub-discipline: personality psychology. We argue that a human
being’s personality is a key determinant of her behavior and performance. We
illustrate, for a limited subset of six personality traits (locus of control, maximizing
tendency, regret disposition, self-monitoring, sensation seeking and type-A/B
behavior), how this logic can be applied in the context of the study of trader
behavior and performance. We explore this line of reasoning in an illustrative asset
market experiment, involving 34 economics students. The results suggest that
different personality traits affect distinct components of trading behavior, and so
trading performance. In particular, more relaxed types who are more susceptible
to regret trade less frequently (a performance enhancing strategy). Impatient,
urgency-driven types with low sensitivity for environmental cues tend towards the
disadvantageous price-taker role (accepting limit orders posted by other traders)
and exhibit a lower tendency towards exploiting arbitrage opportunities.
| Original language | English |
|---|---|
| Place of Publication | Utrecht |
| Publisher | UU USE Tjalling C. Koopmans Research Institute |
| Number of pages | 44 |
| Publication status | Published - 2008 |
Publication series
| Name | Discussion Paper Series / Tjalling C. Koopmans Research Institute |
|---|---|
| No. | 28 |
| Volume | 08 |
| ISSN (Electronic) | 2666-8238 |
Keywords
- Upper echelon theories
- Personality traits
- Financial market experiments
- Trader behavior