Personality Traits Leads to Investor’s Financial Risk Tolerance: A Structural Equation Modelling Approach

Abstract

In today’s scenario, investors’ preferences towards different investment avenues depend upon their risk tolerance level and return associated with investment plan. The tolerance level of investors for risk is influenced by many demographic and psychological factors. Personality traits (PTs) are one of the important factors that impact the tolerance levels of investors for risk. Thus, the existing study focuses on whether (a) the direct effect of Big Five PTs on financial risk tolerance (FRT) or (b) PTs as a second-order (higher-order) factor leads to FRT. Data are cross-sectional in nature, which were collected from 599 investors who invested through Angel Broking Co. (Securities co.) in Delhi and the National Capital Region (NCR) by using online structured questionnaire. To examine the strength of the relationship between variables’ correlation and regression tests were applied using the structural equation modelling approach. The study found that among Big Five personality dimensions, only agreeableness, conscientiousness and openness are significantly associated with FRT, whereas PTs as a second-order (higher-order) factor have a strong association with FRT of investors. Thus, the PT as a second order is the preferred model. JEL Code: G02

Investor personality as a predictor of investment intention – mediating role of overconfidence bias and financial literacy

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Financial risk tolerance of individuals from the lens of big five personality traits – a multigenerational perspective

“…Literature review and research hypothesis 3.1 Personality traits and risk-taking propensity Personality refers to "the relative enduring styles of thinking, feeling and acting that characterise an individual" [Costa et al (1995), p. 124). The literature highlights the relevance of addressing individual personality characteristics when describing financial decisionmaking and risk-taking behaviours (Liu et al, 2016;Gerhard, 2018;Rabbani et al, 2019;Rai et al, 2021;Shank et al, 2021;Akhtar and Malik, 2022). Personality traits and characteristics as determinants have a magnanimous impact on attitudes towards investment risk that are more important than the effect of emotions (Brooks and Williams, 2021).…”

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“…This perceived behaviour then dictates the actual investment behaviour of individuals when it comes to the choice of investments. Recent studies focus on the role played by personality variables in determining the financial risk tolerance of retail investors (Rabbani et al , 2019; Rai et al , 2021). As proven in these studies, the personality traits possessed by an individual have a direct and powerful impact on investment risks taken.…”

Risk Tolerance in Investment Decisions: Are Personality Traits the Real Triggers?

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