Santa Clara University

 The Personalities of Investors

Tailoring Portfolios to Suit Individual Propensities


    When financial advisors meet investors, they typically discuss how much risk investors are willing to take in pursuit of potentially higher returns. The current financial crisis has tested the limits of those discussions, and two researchers at Santa Clara University’s Leavey School of Business say the crisis has exposed some shortcomings in the tools used in the assessment of risk tolerance. Investors who thought they could tolerate risk in late 2007 realized in early 2009 that they cannot.

    “Risk tolerance is not the only question,” says Meir Statman, the Glenn Klimek Professor of Finance in the business school. “People have different notions, propensities and personality traits. The conversation an investor has with an advisor should be structured and wide-ranging, like what you’d have with a caring physician.”

    To help identify the outlines of that structure, Statman and Assistant Professor Carrie Pan have written a paper titled “Beyond Risk-Tolerance: Overconfidence, Regret, Personality, and Other Investor Characteristics,” which is about to be submitted for publication.

    In the paper, they cover a range of propensities and personality traits that can help advisors determine how to guide investors. “We found that there were differences of risk-tolerance depending on the situation,” Statman says. “For instance, young people are more willing to take risks with their portfolios, but less willing to take risks with their jobs. When you’re young, your serious money is in your paycheck. When you’re old, the serious money is in your portfolio.”

    The data for the paper was obtained from, which offers a widely used personality test on its web site. Statman persuaded them to offer an optional supplemental questionnaire he and Pan devised on risk-tolerance and other investor propensities. These include:
    • Propensity for overconfidence, reflected in answers to a question about abilities to pick stocks with above average returns;
    • Propensity for maximization, reflected in agreement with a statement that second best is not good enough;
    • Propensity for regret, reflected in agreement with a statement about regretting choices that did not turn out well, and;
    • Propensity for trust, reflected in answers to a question about whether people can be trusted, or whether one always has to be on guard dealing with people.

    Statman and Pan linked these investor propensities to personality traits such as extraversion, conscientiousness, openness and agreeableness. For example, extraverts are generally willing to take risks, but conscientious people are not. Trusting people are willing to take risk and so are overconfident ones, but propensity for regret neither adds nor detracts from the willingness to take risk.

    As an example of how these factors can come into play, Statman points to the question of propensity for regret. “When investments go badly, some people look back in anguish. Others just say, ‘That’s life; stuff happens.’ If someone is very much prone to regret, an advisor should prepare for it ahead of time rather than be shocked when it happens.

    “The results answer questions asked by financial economists, and by financial advisors. Questions and answers can help financial advisors guide investors.”

    As one of the pioneers in the field of behavioral finance, Statman sees how money and personality interact. “You can’t disconnect issues of money from issues of life,” he says. “After all, what’s money for?”

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