Trust in others: does it affect investment decisions?

Abstract

In recent years, we have witnessed a fundamental change in the way laypeople approach economic issues—from a complete reliance on the financial system as the major source of investment wisdom to self-reliance and self-investments. The current paper examines how personality traits affect novice investors’ decisions regarding the scope and amount of risk they take when making investments. The results indicate that general subjective risk attitudes and social trust influence investment patterns, but not in the same manner. While risk and trust influence the individual’s willingness to take financial risks and invest in risky instruments, trust also affects investment diversification. In contrast to former studies, in this paper we define the term “trust” using two separate measurements—trust in the world versus self-trust. We made this differentiation by applying Schwartz’s value model. We found that subjects who had faith in others took more financial risks, tending to concentrate their funds in these instruments. The opposite pattern was revealed in the behavior of self-trusting investors. These subjects not only invested in less risky instruments, they also divided their capital among several assets. The results suggest that psychological traits influence investment patterns in different manners, which requires a closer examination.