Whenever we undertake any task we bring with us not only a set of mechanical skill but also a sense of self that drives those skills and applies them in a way that is based upon the filtering of information through our experience and our personality.
Anyone who has spent any amount of time observing market participants will know that this is also true in markets. In my experience this to date has only been an anecdotal observation – certain people do things in a certain way and stupid people always do things the same way. That is just the way the world works.
However, recent work in Finland has added some meat to these observations with a study titled – Personality Traits and Portfolio Tilts Towards Value and Size, Andrew Conlin and Jouko Miettunen
The abstract offers the following oberservation –
We show that personality traits are related to an investor’s preferences for value versus growth stocks and for small capitalization stocks versus large capitalization stocks. We have detailed personality trait data and official register holdings of stocks for 710 individuals in Finland. The results show that more extravagant individuals tend towards large capitalization growth stocks; more impulsive people tend towards small capitalization growth stocks; more sentimental investors tend towards small capitalization value stocks; and more social investors tend towards small capitalization stocks with a tilt towards value. The results are consistent when looking at the portfolio characteristics across investors, over time, when using aggregate portfolios of investors with similar personality traits, and both widely held and non-widely held stocks.
This requires some unpacking because there are some nuances in the study that are not obvious from the abstract. To perform the study the researchers were able to access the Finnish Central Securities Depository which gave them details of “the number of stocks held, the number of shares owned of each stock, and the value of each position” for each subject in their study. This dataset was then cross referenced with the individuals ’ psychological-testing records, which are contained in the Northern Finland Birth Cohort 1966 data set. Finland clearly has different data protection laws to us.
From this cross matching the authors were able to build a profile of investor types. This profile was drawn from the Temperament and Character Inventory. This test measures four personality traits of which the authors selected two – novelty seeking and reward dependence.
Novelty seeking is defined as “Novelty-seeking measures the degree to which one exhibits active behaviour in response to stimuli and actively seeks pleasure and reward when none is currently on offer.” Novelty seeking has four subscales; exploratory,excitability,impulsiveness, extravagance and disorderliness.
Participants who score highly in this area are easily bored whilst those who have a low score demonstrate patience. This interesting feature of this is that it overlaps in some ways with the pivotal study – An analysis of the profiles and motivations of habitual commodity speculators from 1998. In this study it was found that for the majority of traders being in the action was more important that being profitable. Traders sought out action not profit. One could therefore intuit that such traders would score very highly on the scale of novelty seeking.
The second trait that was investigated was reward dependence which is defined as the way in which one is emotional and responsive to social stimuli. Reward dependence has three subscales; sentimentality, attachment and dependence.Those with a high score in this area are concerned with what others think about them. Whereas those who have a low score are disinterested in the opinions of others.
Drawing from these two basic traits and the scores generated the authors posit three basic investor traits and actions arising from those traits.
1. Extravagent indiduals have a tendency to hold large growth stocks.
2. Impulsive people hold smaller growth stocks.
3. Sentimental social individuals hold smaller value stocks.
From my pwn observations I can partially see through the veil of psycho-babble to see glimpses of the thousands I have seen over the decades but some of it is an interpretative stretch that struggles with the spectrum of personalities and behaviours in markets. I also have concerns over the samples size – the Finnish market is tiny. However, putting that aside a case can be made that those who are impulsive tend to trade smaller cap rubbish – it is part of their poor attention span and get rich quick mentality. I imagine if you surveyed FX traders you would see a lot of novelty seeking, impulsive behaviours. Those who are sentimental and social tend to love a good narrative and smaller value stocks are often accompanied by a good story and such investors want to be part of these story. I do have trouble with the extravagant individuals and their relationship to large cap stocks since my experience has been that such stocks tend to be the focus of those who are the opposite of extravagant. But the survey may be picking up something at a deeper level that my simple anecdotes dont see.