Trader personality and trading performance: A framework and financial market experiment

A. van Witteloostuijn and K.S. Muehlfeld

No 08-28, Working Papers from Utrecht School of Economics

Abstract: To date, the main source of inspiration for behavioral finance scholars has been cognitive psychology. Cognitive psychology offers a rich set of insights into human decision-making, and the biases that tend to influence it. Such biases provide important reasons as to why anomalies may characterize financial market behavior. This study builds on this tradition by merging in insights from yet another psychology sub-discipline: personality psychology. We argue that a human being’s personality is a key determinant of her behavior and performance. We illustrate, for a limited subset of six personality traits (locus of control, maximizing tendency, regret disposition, self-monitoring, sensation seeking and type-A/B behavior), how this logic can be applied in the context of the study of trader behavior and performance. We explore this line of reasoning in an illustrative asset market experiment, involving 34 economics students. The results suggest that different personality traits affect distinct components of trading behavior, and so trading performance. In particular, more relaxed types who are more susceptible to regret trade less frequently (a performance enhancing strategy). Impatient, urgency-driven types with low sensitivity for environmental cues tend towards the disadvantageous price-taker role (accepting limit orders posted by other traders) and exhibit a lower tendency towards exploiting arbitrage opportunities.

Keywords: Upper echelon theories; Personality traits; Financial market experiments; Trader behavior (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-cbe and nep-exp
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Citations: View citations in EconPapers (3)

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