Thursday, September 25, 2008

Financial Risk Taking and Personality Traits

In my recent post, I reviewed five basic personality traits and their different facets. While there is far more to trading success than having "the right" personality--and there is plenty of reason for believing that different styles of trading call upon different personality traits--it does seem to be the case that personality can contribute to trading success. For example, the propensity to take risk has been found to have personality correlates, with different traits contributing to different risk-related arenas. For example, the trait facet of assertiveness is related to social risk taking, but not to the taking of financial risks. The trait facet of fantasy is related to risk taking in career situations, but not to financial ones.

A careful examination of this research from Nicholson, Fenton-O'Creevy, Soane, and Willman finds that the following trait facets positively contribute to the propensity to take risk:

* Sensation-Seeking - The desire for new experiences;
* Ideas - An interest in new and different ideas;

The following trait facets are inversely correlated with risk-taking:

* Deliberation - The tendency to reflect before acting;
* Straightforwardness - The tendency to address matters directly with people;
* Depression - Feelings of negative self worth and hopelessness;
* Self-Discipline - The tendency to stick to one's responsibilities;
* Impulsiveness - The tendency to make decisions on the spur of the moment
* Aesthetics - An interest in art and beauty.

Across all areas of risk taking--social, career, health, recreation, finance, safety, and social, the trait facets most related to risk-taking in a positive way were sensation seeking and ideas. The facets most negatively related to overall risk-taking were deliberation and compliance (going along with others).

Notice, of course, that the tendency to assume risk is not necessarily an indication of trading and investment success; some of the biggest blowups on Wall St. have been high risk takers. Nonetheless, the ability to take risk is necessary if one is to earn sizable returns. This research suggests two interesting conclusions:

1) There is a tension between financial risk-taking and deliberation/discipline;

2) Financial risk-taking is aided by the ability to generate novel ideas.

My next post in this series will explore each of conclusions and their implications.