Personality traits as predictor of cognitive biases: moderating role of risk-attitude

Abstract

Purpose This study aims to examine that personality traits are associated with the investor’s ability to exhibit disposition effect, herding behavior and overconfidence. It also explores how risk-attitude can modify investor behavior by moderating the association between personality traits, disposition effect, herding and overconfidence. Design/methodology/approach Data were collected from 396 respondents by using personally administrated survey. Confirmatory factor analysis (CFA) was used to confirm the validity and reliability of data. Regression analysis was used to test the proposed hypotheses. Findings The results supported the proposed hypotheses and showed that extravert investors were more likely to exhibit disposition effect, herding and overconfidence. The conscientiousness trait was associated with disposition effect and overconfidence, while neuroticism was associated with herding behavior. The results confirmed the moderating effect of risk aversion on the association between personality traits, disposition effect, herding and overconfidence. Originality/value This study demonstrates how risk aversion modes the strength of association between psychological characteristics (represented by personality traits) and cognitive biases (disposition effect, herding and overconfidence). The results support the “auction” interpretation of investors' behavior by suggesting that personality traits are associated with investment decision-making and that investors are marginal price setters.