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OPINION

Personality matters

Personality matters
March 19, 2015
Personality matters

Alessandro Bucciol and Luca Zarri at the University of Verona studied the personalities and portfolios of thousands of American investors aged between 50 and 80. They found that shareholding is significantly positively correlated with cynicism but negatively correlated with agreeableness.

This is partly because self-centred people want higher returns in order to keep up with the Joneses or do better than them. But Messrs Bucciol and Zarri also show that cynicism is associated with greater optimism about equity returns - perhaps because if you believe others are greedy you’ll expect them to drive up share prices.

However, this is by no means the only evidence that our personality affects our investments. For example:

■ Researchers at the University of Arizona show that investors who are conservative in their politics are more likely to be conservative in their stock selection, preferring older and dividend-paying stocks more than left-leaning investors do.

■ Stephan Siegel at the University of Washington has shown that people are more likely to be value investors if they experienced recessions when they entered the labour market or if they come from a poor family.

■ Economists at the University of Sheffield have found that people are more likely to own shares if they regularly attend church or spend more time with friends. Andrew Clark at the Paris School of Economics has suggested a reason for this. Religious belief, he shows, is like a form of insurance, in the sense that religious people suffer smaller falls in well-being in response to bad economic events.

■ A study of twins in Sweden has found that identical twins' portfolios are much more similar to each other than those of non-identical twins, which points to a genetic basis for differences in our investments.

There's also evidence that our character affects our investment performance. Economists at the University of Western Australia show that extravert investors earn higher risk-adjusted returns than others, perhaps because they churn their shareholdings less often. They have also found that investors who are open to new experiences do better, perhaps because such people are better able to cope with uncertainty.

It has been said that Warren Buffett's success owes more to character than to intellect - to his ability to be patient and disciplined. The point generalises: character matters for everyone’s performance.

Investing is not simply a matter of cold-bloodedly assessing the facts. Two investors with the same budget, information, opportunities and risks will have very different portfolios to the extent that their characters differ.

Investors should be aware of this.

First, we should ask: am I optimistic about the market (or a segment thereof) because of hard facts which others don’t know about, or because of my psychological disposition?

Secondly, we should consider not only whether we have the financial resources to cope with equity risk, but the psychological resources too. For example, if you're the conscientious type you might regard a loss as a personal failure, an error of judgement. If so, it'll hurt you more than if you regard it (rightly or wrongly!) are just bad luck. Similarly, if you have a wide circle of friends and interests you'll have something to take your mind off losses. This will make them more bearable than if you're the sort of person to dwell on them.

We cannot know the future. But we can know ourselves. Doing so might make us better investors.