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