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How Personalities Determine Investment Styles

You're either born a growth-stock investor, or you're not.

John Rekenthaler, 09/05/2017

Test Subjects
On my desk is a paper that purports to show how investment preferences are correlated with personality. This being 2017 rather than the Reagan years, the paper doesn’t explain that rock-climbers like stocks, while librarians favor bonds. Arguments that physical risk-takers prefer equities have come and gone (and have largely been discredited.) This effort, instead, involves investment styles, and bears a title that only a professor could love: Personality Traits and Portfolio Tilts Toward Value and Size.

All right, two professors—the authors being the duo of Andrew Conlin and Jouko Miettunen, from Finland’s University of Oulu. (A cold place that; the average January high is -8 degrees Celsius, which doesn’t sound a whole lot better when expressed in Fahrenheit.)

Finland, it turns out, takes a rather different view of privacy than does the United States. The authors not only were able to determine “the number of stocks held, the number of shares owned of each stock, and the value of each position” for each person in their study, by viewing the records of the Finnish Central Securities Depository, but they were also able to access those investors’ psychological-testing records, which are contained in the Northern Finland Birth Cohort 1966 data set. For investment researchers, at least, Finland is heaven on this earth.

The TCI
The psychological profile gives the results from a test called the Temperament and Character Inventory (TCI), which, the authors state, “has been used extensively in the fields of medicine and psychiatry.” The TCI test measures four personality traits, from which the authors select two: novelty-seeking and reward-dependence.

1) Novelty-Seeking—

“Novelty-seeking measures the degree to which one exhibits active behavior in response to stimuli and actively seeks pleasure and reward when none is currently on offer.”

Restated into plainer English, people who score highly on novelty-seeking are easily bored. In contrast, those with patience receive low scores.

2) Reward-Dependence—

is vice president of research for Morningstar.

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