How personality influences financial decisions

Our personalities influence the financial decisions we take and how we experience our financial situation. This is the conclusion of a thesis in behavioural finance presented at Linköping University. The results are, however, not clear-cut, and some are really surprising.

Camilla Strömbäck at Campus Valla. Camilla Strömbäck, PhD-student at LiU, a few days before  her public disputation. Photo credit: Mikael Sönne

Linked to personality traits

In her doctoral thesis, Self-Control, Financial Well-Being, and Motivated Reasoning: Essays in Behavioral Finance, Camilla Strömbäck examines how certain personality traits affect the financial decisions people take. She has primarily looked at self-control, and also examined optimism and deliberativeness. In the first of the four articles that make up the thesis, participants have given self-assessments of their personalities – and the correlation to their behaviour was clear.

People who describe themselves as controlled, optimistic and deliberative are more likely to take sound financial decisions (such as paying bills on time, putting money away towards a pension, keeping a rainy-day fund). These participants had low anxiety about their financial situation, and had a reasonably firm image of their economic future.

“The link is clear, and statistically significant”, says Camilla Strömbäck

Habits and temptations

The results became, however, more difficult to interpret when the actual cognitive abilities (such as the abilities to resist impulsive actions and to avoid following well-worn mental pathways) of the participants were measured. The second article in the thesis included not only self-assessment of personality traits, but also tests that measure both intelligence and impulse control.

Camilla Strömbäck at Campus Valla.Camilla Strömbäck at Campus Valla.

The study found the same link between self-image and financial decisions as previously, but no correlation at all between intelligence/cognitive abilities and financial behaviour.

“We had expected the link to exist, and were surprised by this result”, says Camilla Strömbäck.

“It seems that impulse control is not as important for economic behaviour as developing good habits and being able to resist temptation. Habits prevent a person getting into financial difficulty, and they are already in place when a decision must be taken.”

Emotional effects

The third article in the thesis also gave surprising results. In the article, Camilla Strömbäck reports investigations into whether self-control affects the ability to predict the emotional effect of different decisions, and using this prediction to take as advantageous decisions as possible.

She believed before the experiment that such a link would exist, but the results showed the opposite.

“There may be several reasons for this. Maybe the hypothesis is wrong, and there really is no link. But it may also be a result of the study design, and the fact that we only studied students. More research will be needed to determine whether a link exists or not.”

Intuition or analysis

The fourth article in the thesis concerns what is known as “motivated reasoning”, which describes how people base their interpretation of information more on their pre-formed opinions than on facts. Previous work at LiU has shown that the phenomenon exists, not least in controversial issues such as immigration, and Camilla Strömbäck has examined how much it is affected by pressure of time and analytical ability.

The results show that pressure of time neither increases nor reduces motivated reasoning, while a high analytical ability reduces it. The latter is compatible with previous LiU research, but contradicts other research.

“Both my work and that of my LiU colleagues suggest that motivated reasoning is more of an intuitive process than an analytical one”, says Camilla Strömbäck.

“There may be several reasons for the differences between studies. The situation may influence the results, or different factors can interact. Further, it’s possible that analytical ability can be compensated for by something else. We haven’t got a definitive answer, and also in this case a lot of future research is required.”

Translated by George Farrants

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