Overconfidence, overreaction and personality

Robert Durand, Rick Newby, Kevin Tant and Sirimon Trepongkaruna

Review of Behavioral Finance, 2013, vol. 5, issue 2, 104-133

Abstract: Purpose - – The purpose of this paper is to systematically profile investors’ personality traits to examine if, and how, those traits are associated with phenomena observed in financial markets. In particular, the paper looks at overconfidence and overreaction in an experimental foreign exchange market. Design/methodology/approach - – The paper measures the personality of the subjects using the short form of the NEO-PIR instrument, the NEO-FFI developed by Costa and McRae (1992) which is based on Norman's (1963) “Big Five” personality constructs ofnegative emotion, extraversion, openness to experience, agreeablenessandconscientiousness. The paper measures psychological gender using questions developed by Bem (1994).Preference for innovationandrisk-taking propensityare measured using instruments developed by Jackson (1976). The paper then examines the behavior of the subject who traded interactively in “real time” in an interactive-simulated foreign exchange market where “price discovery” was instantaneous and pricing decisions were made instantaneously as items of news, determined by the researchers, were released. Findings - – The paper demonstrates that personality traits are associated with overconfidence and overreaction in financial markets. The paper presents meta-analysis which facilitates the development of a posteriori theories of how particular traits affect investment; there are important roles forrisk-taking propensity, negative emotion, extraversion, masculinity, preference for innovationandconscientiousness. Originality/value - – A typical behavioral finance paper might find an empirical regularity in prices and, on the basis of such patterns, infer the underlying psychology motivating the behavior of investors. The approach differs from this caricature of the “typical” behavioral finance paper. The paper does not infer the underlying psychology of investors from patterns in prices. Rather, the paper learns about investors by systematically profiling their personality traits. The paper then demonstrates how those traits are associated with the prices generated by the investors the authors study. In focussing on the role of individual personality, the paper refocusses behavioral finance on the individuals who set prices.

Keywords: Behavioural finance; Jackson's personality inventory; Norman's “Big Five”; Overreaction; Psychological gender (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:rbfpps:v:5:y:2013:i:2:p:104-133

DOI: 10.1108/RBF-07-2012-0011

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