Elucidating the Influence of Demographics and Psychological Traits on Investment Biases

Authors: Huei-Wen Lin

Abstract:

This study explored the relationship between psychological traits, demographics and financial behavioral biases for individual investors in Taiwan stock market. By using questionnaire survey method conducted in 2010, there are 554 valid convenient samples collected to examine the determinants of three types of behavioral biases. Based on literature review, two hypothesized models are constructed and further used to evaluate the effects of big five personality traits and demographic variables on investment biases through Structural Equation Model (SEM) analysis. The results showed that investment biases of individual investors are significantly related to four personality traits as well as some demographics.

Keywords: Behavioral finance, Big Five, Disposition effect, Herding, Overconfidence, Personality traits.

Digital Object Identifier (DOI): doi.org/10.5281/zenodo.1081985

References:

[1] D. Acker, and N. W. Duck, "Cross-cultural overconfidence and biased self-attribution," J. Soc. Econ., vol. 37, pp.1815-1824, 2008.
[2] R. P. Bagozzi, and Y. Yi, "On the evaluation of structural equation models," J. Acad. Market. Sci, vol. 16, pp. 74-94, 1988.
[3] T. E. Bailard, D. L. Biehl, and R. W. Kaiser, Personal Money Management (5th ed.). Chicago, Ill.: Science Research Associates, 1986.
[4] B. M. Barber, and T. Odean, "The courage of misguided convictions," Financial Analysts Journal, vol. 55, no. 6, pp. 41-55, 1999.
[5] B. M. Barber, and T. Odean, "Boys will be boys: gender, overconfidence, and common stock investment," Q. J. Econ., vol. 116, no. 1, pp. 261-292, 2001.
[6] G. Bhandari, and R. Deaves, "The demographics of overconfidence," J. Behav. Finance, vol. 7, no. 1, pp. 5-11, 2006.
[7] B. M. Byrne, Structural Equation Modeling with AMOS - Basic Concepts, Applications, and Programming, Mahwah, New Jersey: Lawrence Erlbaum Associates, 2001.
[8] P. T. Jr. Costa, and R. R. McCrae, Revised NEO Personality Inventory and NEO Five-Factor Inventory: Professional Manual. FL: Psychological Assessment Resources, 1992.
[9] N. Dass, M. Massa, and R. Patgiri, "Mutual funds and bubbles: The surprising role of contractual incentives," Rev. Financ. Stud., vol. 21, no. 1, pp. 51-99, 2008.
[10] A. Devenow, and I. Welch. "Rational herding in financial economics," Eur. Econ. Rev., vol. 40, no. 3-5, pp. 603-615, 1996.
[11] A. H. Eagly, and L. L. Carli, "Sex of researchers and sex-typed communications as determinants of sex differences in influence ability: a Meta-Analysis of Social Influence Studies," Psychol. Bull., vol. 90, no. 1, pp.1-20, 1981.
[12] N. S. Endler, and D. Magnusson, "Toward an interactional psychology and personality," Psychol. Bull., vol. 83, no. 5, pp. 956-974, 1976.
[13] E. F. Fama, "Efficient capital markets: a review of theory and empirical work," J. Finance, vol. 33, no. 4, pp. 75-83, 1970.
[14] R. Garvey, A. Murphy, and F. Wu, "Do losses linger," The Journal of Portfolio Management, vol. 33, no. 4, pp. 75-83, 2007.
[15] J. F. Hair, R. E. Anderson, R. L. Tatham, and W. C. Black, Multivariate Data Analysis (5th ed.). Prentice Hall International: UK, 1998.
[16] J. W. Hoelter, "The analysis of covariance structures: Goodness-of-fit indices," Socio. Meth. Res., vol. 11, no. 3, pp. 325-344, 1983.
[17] L. A. Hayduk, Structural Equation Modeling with LISREL: Essentials and Advances, Baltimore, MD: John Hopkins University Press, 1987.
[18] K. C. Jöreskog, and D. Sörbom, LISREL VIII: Reference Guide, Scientific Software International Inc., Chicago, 1993.
[19] D. Kahneman, and A. Tversky, "Prospect theory: an analysis of decision under risk," Econometrica, vol. 47, no. 2, 1979, pp. 263-291.
[20] R. B. Kline, Principles and Practice of Structural Equation Modeling, New York: Guilford Press, 1998.
[21] S. Maital, R. Filer, and J. Simon, "What do people bring to the stock market (beside money)?" The Economic Psychology of Stock Market Behavior, In B. Gilad and S. Kaish (Eds.), Handbook of Behavioral Economics Behavioral Macroeconomics, vol. B, Greenwich, Connecticut, JAI Press Inc., 1986, pp. 273-307.
[22] I. B. Myers, and M. H. McCaulley, Manual: A guide to the Development and Use of the Myer Briggs Type Indicator. Palo Alto, CA: Consulting Psychologist Press, Inc., 1985.
[23] R. Raine-Eudy, "Using structural equation modeling to test for differential reliability and validity: An empirical demonstration," Structural Equation Modeling, 2000, vol. 7, no. 1, pp. 124-141.
[24] J. B. Rotter ,"Generalized expectancies for internal versus external control of reinforcements," Psychol. Monogr., vol. 80, pp.1-27, 1966.
[25] D. S. Scharfstein, J. C. Stein, "Herd behavior and investment,- Am. Econ. Rev., vol. 80, no.3, pp. 465-479, 1990.
[26] P. S. Schaefer, C. C. Williams, A. S. Goodie, and, W. K. Campbell, "Overconfidence and the Big Five," J. Res. Pers., vol. 38, pp. 473-480, 2004.
[27] S. Sehgal, and N. Tripathi, "Investment strategies of FIIs in the Indian equity market," The Journal of Business Perspective, vol. 13, no. 1, pp. 11-18, 2009.
[28] H. Shefrin, and M. Statman, "The disposition to sell winners too early and ride losers too long: theory and evidence," J. Finance, vol. 40, no. 3, pp. 777-790, 1985.
[29] W. R. Sias, "Institutional herding," The Review of Financial Studies, vol. 17, no. 1, pp. 165-206, 2004.
[30] P. G. Shu, Y. H. Yeh, S. B. Chiu, and H. C. Chen, "Are Taiwanese individual investors reluctant to realize their losses?" Pac. Basin. Finance J., vol. 13, no. 2, pp. 201-223, 2005.
[31] M. Statman, S. Thorley, and K. Vorkink, Investor overconfidence and trading volume. Rev. Financ. Stud., vol. 19, no. 4, pp. 1531-1565, 2006.
[32] E. R. Stone, C. L. Dodrill, and N. Johnson, " Depressive cognition: A test of depressive realism versus negativity using general knowledge questions," J. Pers., vol. 135, no.6, pp. 583-602, 2001.
[33] G. Van de Venter, and D. Michayluk, "An insight into overconfidence in the forecasting abilities of financial advisors," Aust. J.Manag., vol. 32, no. 3, pp. 545-557, 2008.
[34] D. G. Williams, "Dispositional optimism, neuroticism, and extraversion," Pers. Indiv. Differ., vol. 13, no. 4, pp. 475-477, 1992.
[35] R. N. Wolfe, and J. W. Grosch, "Personality correlates of confidence in one-s decisions," J. Pers., vol. 58, pp. 515-534. , 1990.
[36] U. Yavas, "The base of power in international channels," Int. Market. Rev., vol. 15, no. 2, pp. 140-150, 1998.