Abstract
PurposeThis study aims to examine that personality traits are associated with the investor’s ability to exhibit disposition effect, herding behavior and overconfidence. It also explores how risk-attitude can modify investor behavior by moderating the association between personality traits, disposition effect, herding and overconfidence.Design/methodology/approachData were collected from 396 respondents by using personally administrated survey. Confirmatory factor analysis (CFA) was used to confirm the validity and reliability of data. Regression analysis was used to test the proposed hypotheses.FindingsThe results supported the proposed hypotheses and showed that extravert investors were more likely to exhibit disposition effect, herding and overconfidence. The conscientiousness trait was associated with disposition effect and overconfidence, while neuroticism was associated with herding behavior. The results confirmed the moderating effect of risk aversion on the association between personality traits, disposition effect, herding and overconfidence.Originality/valueThis study demonstrates how risk aversion modes the strength of association between psychological characteristics (represented by personality traits) and cognitive biases (disposition effect, herding and overconfidence). The results support the “auction” interpretation of investors' behavior by suggesting that personality traits are associated with investment decision-making and that investors are marginal price setters.
Highlights
Behavioral finance assumes that investors’ actions are driven by bounded rationality (Barberis and Thaler, 2003), and their decision-making is influenced by psychological, cognitive and emotional factors (Barberis and Thaler, 2003; Chaffai and Medhioub, 2014; Endler and Magnusson, 1976; Ricciardi, 2008)
Durand et al, (2008, 2013b, 2019) and Lin (2011) argued that investors psychological factors, that is, personality traits influence the likelihood of exhibiting cognitive biases during the investment decision process
The main objective of the current study was to demonstrate that personality traits are associated with investor ability to exhibit disposition effect, herding and overconfidence
Summary
Behavioral finance assumes that investors’ actions are driven by bounded rationality (Barberis and Thaler, 2003), and their decision-making is influenced by psychological, cognitive and emotional factors (Barberis and Thaler, 2003; Chaffai and Medhioub, 2014; Endler and Magnusson, 1976; Ricciardi, 2008). The human brain can hinder investment decisions (Shefrin and Statman, 2000), depending on the psychological characteristics of the investors (Durand et al, 2008, 2013a, 2013b, 2019). The psychological factors can induce individuals to deviate from rational decision-making processes through an exhibition of cognitive biases, under conditions of risk and uncertainty (Baker and Wurgler, 2007; Kahneman and Tversky, 2013). Durand et al, (2008, 2013b, 2019) and Lin (2011) argued that investors psychological factors, that is, personality traits influence the likelihood of exhibiting cognitive biases during the investment decision process. Investors face uncertain situations that can potentially result in losses or gains. Investors must quickly respond to such a situation either to prevent losses or take
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