Behavioral Finance: Five Key Personality Traits
Although every individual is different, research has identified five key traits that are critical to understanding your overall personality style and, by extension, how you are likely to behave in various investment situations.
Conscientiousness – People high in this trait are organized, disciplined, punctual and, sometimes, uptight. Those low in this characteristic are disorganized, impulsive and prone to chase whatever is “hot” in the market. They also tend to be more spontaneous and relaxed.
Emotionality – The two sides of this coin are 1) those who act emotionally, can’t tolerate volatility, are often pessimistic; and 2) those who maintain a steady outlook and deal well with ups and downs. Guess who does better in the market.
Openness – Some people are more curious and open to new ideas and approaches than others. These folks may be early adopters of new investment ideas, but may also resist rules that can help them limit losses.
Extraversion – Extroverts are generally gregarious, social and optimistic – sometimes too optimistic. Introverts typically are more deliberate and find it easier to be alone. They may focus more on risk than reward.
Agreeableness – People high in this trait usually value getting along with others, which may win them friends but hamper them when it comes to making difficult decisions. Those low in this area are often competitive and less inclined to trust, which might help them not get sucked into dubious investments.
It’s important to understand that behavioral finance isn’t about getting rid of our personality characteristics and emotions. The real goal is to increase our emotional intelligence – the ability to identify, evaluate and manage our emotions and those of others to attempt to achieve better results.
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(An excerpt from "Behavioral Finance: Is the Investor’s Worst Enemy the Person in the Mirror?" from Worthwhile magazine, a quarterly periodical dedicated to serving the clients of Raymond James advisors and affiliated advisory firms)