The role of personality traits in household loan expectations and borrowing constraints

Olga Goldfayn-Frank and Nathanaël Vellekoop

No 381, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: We explore how personality traits are related to household borrowing behavior. Using survey data representative for the Netherlands, we consider the Big Five personality traits (openness, conscientiousness, agreeableness, extraversion and neuroticism), as well as the belief that one is master of one's fate (locus of control). We hypothesize that personality traits can complement as well as substitute financial knowledge of a household. We present three sets of results. First, we find that personality traits are positively correlated with borrowing expectations. Locus of control, extraversion and agreeableness are correlated with informal borrowing expectations, which is the expectation that one can borrow from family and friends. With respect to expectations on the approval of a formal loan application, it is locus of control and conscientiousness that are positively associated. Effect sizes are large and economically meaningful. Second, we find that personality traits are important for borrowing constraints. A more internal locus of control and higher neuroticism are correlated with being denied for credit, as well as discouraged borrowing. Our third set of results reports findings on personality traits and loan regret, and how traits are correlated with dealing with loan troubles. Many households in our sample express regret (21%), but more open, more agreeable and more neurotic individuals are more likely to express regret. Our results are not driven by financial knowledge, time preferences or risk attitudes. Overall these findings imply that non-cognitive traits are important for borrowing behavior of households.

Keywords: borrowing constraints; personality traits; household finance (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-ban, nep-cbe, nep-fdg and nep-neu
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:381

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