Overconfidence, Overreaction and Personality

Review of Behavioral Finance
Overconfidence, overreaction and personality

Robert Durand, Rick Newby, Kevin Tant, Sirimon Trepongkaruna,
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RBF
5,2
Overconfidence, overreaction
and personality
Robert Durand
Department of Finance and Banking, Curtin University, Perth, Australia
104
Rick Newby
Department of Accounting and Finance, University of Western Australia,
Perth, Australia
Kevin Tant
Department of Accounting and Finance, Monash University, Melbourne,
Australia, and
Sirimon Trepongkaruna
Department of Accounting and Finance, University of Western Australia,
Perth, Australia
Abstract
Purpose – The purpose of this paper is to systematically profile investors’ personality traits to
examine if, and how, those traits are associated with phenomena observed in financial markets. In
particular, the paper looks at overconfidence and overreaction in an experimental foreign exchange
market.
Design/methodology/approach – The paper measures the personality of the subjects using the
short form of the NEO-PIR instrument, the NEO-FFI developed by Costa and McRae (1992) which is
based on Norman’s (1963) “Big Five” personality constructs of negative emotion, extraversion,
openness to experience, agreeableness and conscientiousness. The paper measures psychological
gender using questions developed by Bem (1994). Preference for innovation and risk-taking propensity
are measured using instruments developed by Jackson (1976). The paper then examines the behavior
of the subject who traded interactively in “real time” in an interactive-simulated foreign exchange
market where “price discovery” was instantaneous and pricing decisions were made instantaneously
as items of news, determined by the researchers, were released.
Findings – The paper demonstrates that personality traits are associated with overconfidence and
overreaction in financial markets. The paper presents meta-analysis which facilitates the development
of a posteriori theories of how particular traits affect investment; there are important roles for risk-
taking propensity, negative emotion, extraversion, masculinity, preference for innovation and
conscientiousness.
Originality/value – A typical behavioral finance paper might find an empirical regularity in prices
and, on the basis of such patterns, infer the underlying psychology motivating the behavior
of investors. The approach differs from this caricature of the “typical” behavioral finance paper.
The paper does not infer the underlying psychology of investors from patterns in prices. Rather, the
paper learns about investors by systematically profiling their personality traits. The paper then
demonstrates how those traits are associated with the prices generated by the investors the authors
study. In focussing on the role of individual personality, the paper refocusses behavioral finance on the
individuals who set prices.
Keywords Behavioural finance, Jackson’s personality inventory, Norman’s “Big Five”, Overreaction,
Psychological gender
Paper type Research paper
Review of Behavioral Finance
Vol. 5 No. 2, 2013
pp. 104-133
r Emerald Group Publishing Limited
1940-5979
DOI 10.1108/RBF-07-2012-0011 JEL classification – G02
Introduction Overconfidence
Behavioral finance looks to psychology to explain phenomena observed in financial and overreaction
markets. A typical behavioral finance paper might find an empirical regularity in
prices and, on the basis of such patterns, infer the underlying psychology motivating
the behavior of investors. There are many regularities to be explained and many
potential explanations have been utilized. Fama (1998) suggested that “[y] given the
demonstrated ingenuity of the theory branch of finance and given the long litany of 105
apparent judgment biases unearthed by cognitive psychologists (De Bondt and Thaler,
1985), it is safe to predict that we will soon see a menu of behavioral models that can
be mixed and matched to explain specific anomalies. My view is that any new model
should be judged [y] on how it explains the big picture [y]” (p. 291). To illustrate
Fama’s point, momentum ( Jegadeesh and Titman, 1993, 2001) has been explained using
underreaction (Hong et al., 2000), overreaction ( Jegadeesh and Titman, 2001), the
disposition effect (Grinblatt and Han, 2005) and biased self-attribution and
overconfidence (Chui et al., 2010); the absence of an attempt to compare competing

behavioral explanations is striking[1].
The papers cited above seek to model a particular phenomenon based on an
assumption, or set of assumptions, about the individuals who set prices in the market.
Someone, whether she invests on her own behalf or on behalf of someone else, transacts
to create each price which is used in these studies. These prices are aggregated to
isolate the phenomenon being studied; in doing so, the individual decisions involved in
making those transactions are also aggregated. Behavioral finance theories are based
on individuals yet our analyses lose sight of these individuals.
Our approach differs from this caricature of the “typical” behavioral finance paper.
We do not infer the underlying psychology of investors from patterns in prices. Rather,
we learn about investors by systematically profiling their personality traits. We then
demonstrate how those traits are associated with the prices generated by the investors
we study. In focussing on the role of individual personality, we refocus behavioral
finance on the individuals who set prices. Our study, like Durand et al. (2008) (DNS) and
Durand et al. (2013) (DNPS), argues that individuals’ propensity to make certain
decisions is a function of the type of person the individual is. That is, a person’s
personality influences the decisions she makes. Overconfidence and overreaction are
the foci of this paper and we confirm DNS and DNPS in demonstrating that personality
is the wellspring of investors’ behavior.
DNS find that Norman’s (1963) “Big Five” personality inventory (emotional stability,
extraversion, openness to experience, agreeableness and conscientiousness), the
psychological gender constructs of masculinity and femininity (Constantinople, 1973)
and the personality traits of preference for innovation and risk-taking propensity are
associated with the investment decisions and resulting performance of a sample of
21 individual investors from Australia[2]. DNS’ subjects are real investors who held a
portfolio of Australian equities in the financial year ending on the 30th of June 2005.
Their results (summarized in tables XII and XII of their paper) indicate that preference
for innovation and masculinity were associated with portfolio performance, negative
emotion, risk-taking propensity and openness to experience were associated with
exposure to risk, negative emotion, risk-taking propensity and extraversion were
associated with trading.
DNPS replicate DNS using a larger sample of 115 student investors who completed
an investment exercise over a shorter period (March 17, 2008-May 9, 2008). They
confirm DNS’ finding that personality is associated with investment decisions
RBF and resulting performance. DNPS also extend DNS in an important way. DNPS argue
5,2 that “there is the easy, ‘Dear Abby’, interpretation of [DNS’] finding: an advisor might
provide the best advice for a client by knowing her better. There is, however, a more
challenging interpretation of the DNS results: the ‘auction’ interpretation. This
suggests that investors with particular personality traits are the marginal price
setters for securities with particular traits” (Durand et al., 2013, p. 2). DNPS find
106 that personality is associated with investors’ utilization of the disposition effect and
the availability heuristic. The disposition effect and the availability heuristic have
been utilized to explain a wide range of financial phenomena. DNPS argue that if
the disposition effect and the availability heuristic explain price movements,
and if personality explains the disposition effect and the availability heuristic,
then personality explains price movements. The evidence in DNPS is supportive
of the investors with particular personality traits being the marginal price setters in
financial markets.
We extend DNS and DNPS in showing that personality is related to overconfidence

and overreaction. Overconfidence and overreaction have been used to model a range of
financial phenomena. As we have noted, DNPS demonstrate the association of
personality to the disposition effect and the availability heuristic. In demonstrating
that overconfidence and overreaction are also associated with personality, we provide
further evidence that the plethora of explanations that have been utilized in behavioral
finance are a function of personality.
Both DNS and DNPS use personality traits but they do not propose hypotheses
on why, and how, particular traits might work. Neither DNS nor DNPS need to do this;
they ask only whether personality per se is associated with investment. This study,
together with DNS and DNPS, presents 34 analyses where an aspect of investment has
been used as a dependent variable. The independent variables used in the three studies
are the same. This allows us to present a meta-analytical analysis of the personality
traits used in these studies in the final section of this paper. We propose a posteriori
hypotheses to guide future studies on personality and investment.
Personality
DNS quote one of the Oxford English Dictionary’s definitions of personality as “[y]
the quality or collection of qualities which makes a person a distinctive individual; the
distinctive personal or individual character of a person, especially of a marked or
unusual kind” (Durand et al., 2008, p. 206, footnote 1). The Oxford English Dictionary
tracks the development of “personality” in English from something pertaining to God
to something distinctive about each man and woman. A clear definition of personality
is elusive but it appears to involve what makes us different and, from this difference,
special. McDougall (1932) is a prominent and early example of a researcher arguing
that it is the traits possessed by individuals – that is, their personality – that motivates
behavior. Understanding an individual’s personality should therefore help explain
their interactions with the world.
While all individuals are different, they share common features, or traits. These
traits seem to capture aspects of individuals’ inner lives which are manifested in their
interaction with the world. Psychologists have modeled, or summarized, individuals’
personalities by creating measurable indices around these shared traits. DNS, DNPS
and this paper use the same traits, and methodology of measuring those traits. This
permits us to develop the findings in DNS and DNPS and also to validly conduct the
meta-analysis of personality and investment that will be reported later in this paper.
Following DNS and DNPS, we capture our subjects’ personalities using a number of Overconfidence
metrics. We use the short form of the NEO-PIR instrument, the NEO-FFI developed and overreaction
by Costa and McRae (1992) which is based on Norman’s (1963) “Big Five” personality
constructs of negative emotion, extraversion, openness to experience, agreeableness
and conscientiousness. The names of these traits are themselves good summaries
of the aspect of personality which each captures, although more detail may be
found in Durand et al. (2008, pp. 194 and 195). The questionnaire includes 60 items 107
(12 for every construct) with each “measured” using a five-point agreement scale.
Therefore, summary statistics for the five traits presented for the 61 subjects in Table I
will range from 12 (suggesting that they carry little of that personality trait) to a
maximum of 60.
DNS and DNPS have argued that the biological differences between men and
women are, as far as finance goes, superficial. Their argument, however, is
controversial given work, starting with Barber and Odean (2001), arguing that
biological gender is an important feature of financial decision making. While we would

wish to further analyze this issue, our sample size precludes a rigorous investigation
of this issue. We follow DNS and DNPS in using sex roles (Bem, 1977) in our analysis.
Psychological masculinity is associated with being task focussed. Psychological
femininity is associated with a relationship focus (O’Neill and Blake-Beard, 2002).
Using the same questionnaire as DNS and DNPS, we asked 30 questions developed
by Bem (1994) to determine psychological gender and the results for our subjects are
reported in Table I.
The remaining questions assessed subjects’ preference for innovation and risk-
taking propensity using instruments developed by Jackson (1976). We follow DNS and
DNPS and measure risk-taking propensity (the main focus of which is financial risk,
Stewart et al., 2003) and preference for innovation which measures the ability to
monitor and be open to adapting to changes in their environment (Welsch and Young,
1982). Preference for innovation has been found to apply to financial environments in
entrepreneurship research (Roberts and Robins, 2000).
Experimental design
We follow, and confirm, DNS and DNPS in demonstrating that personality is
the wellspring of investors’ behavior. The personality metrics described in the
previous section are captured by the standard instruments used in both DNS and
DNPS and described in detail in the previous section as well as in Durand et al.
(2008, p. 196).
The study seeks to examine the relationship of personality to overconfidence
and overreaction. To achieve this, we require an experimental setting which provides
a realistic situation in which subjects might have the opportunity to display
overconfidence (or not to display this behavior) and to overreact (or underreact) to
stimuli. DNPS utilize student subjects in their study of the availability heuristic and
the disposition effect by monitoring the activity of subjects engaged in a portfolio
management exercise over a number of weeks (March-May 2008). DNPS therefore
conduct a clinical study rather than an experiment. They observe their subjects’
personality metrics and then monitor them in an exercise as close as possible to the
real investors studied by DNS. DNPS’ work cannot be considered an experiment as
they do not utilize inputs which can be manipulated and controlled.
This study is similar to DNPS in that we “piggy back” on students undertaking an
investment exercise. The 61[3] student subjects in this study traded interactively in
5,2
108
RBF
Table I.
personality traits
Summary statistics –
Negative Openness to Preference for Risk-taking
emotion Extraversion experience Agreeableness Conscientiousness Masculinity Femininity innovation propensity
Mean 33.1 41.3 36.7 41.1 44.1 47.0 51.5 31.0 29.5
Median 34.0 42.0 37.0 41.0 44.0 47.0 52.0 32.0 30.0
Maximum 45.0 55.0 50.0 51.0 57.0 68.0 65.0 41.0 44.0
Minimum 22.0 28.0 26.0 29.0 33.0 30.0 32.0 16.0 16.0
SD 5.28 5.66 4.75 4.91 4.95 7.22 7.78 5.51 5.09
Skewness 0.31 0.01 0.19 0.20 0.03 0.14 0.42 0.80 0.11
Kurtosis 2.67 2.76 3.12 2.85 2.69 3.29 2.72 3.14 3.63
Jarque-
Bera 1.3 0.1 0.4 0.5 0.3 0.4 2.0 6.6 1.1
p-value 0.5248 0.9317 0.8151 0.7949 0.8786 0.8086 0.3747 0.0369 0.5679
Notes: Summary statistics for the personality attributes of the 61 subjects of this study is displayed. Negative emotion, extraversion, openness to experience,
agreeableness and conscientiousness are Norman’s “Big Five” personality traits, measured using the short form of Costa and McRae’s NEO-PIR scale (Costa
and McRae, 1992); scores on this scale range from 12 to 60. Preference for innovation and risk-taking propensity are measured following Jackson (1976) and
scores on this scale range from 7 to a high of 49. Masculinity and femininity are measured using a reduced form of Bem’s Sex Role Inventory (Bem, 1994) and scores
on this scale range from 10 to 70. Jarque-Bera is a test of the null hypothesis that the distribution of observations conforms to a Gaussian normal distribution
“real time” in an interactive-simulated foreign exchange market where “price Overconfidence
discovery” was instantaneous and pricing decisions were made instantaneously as and overreaction
items of news, determined by the researchers, were released. In total, 51 percent (30) of
the subjects were male. The overwhelming majority of subjects, 97 percent (59), were
from an Asian cultural background.
The subjects were enrolled in a 13-week unit related to foreign exchange trading at
a leading Australian university[4] in the second semester of 2010. Like DNPS, each 109
student was required to reflect on their actions in their designated role (which we will
discuss below) and provide a written report to the unit leader (as chief executive officer)
outlining their performance and actions, including self-appraisal on the positive and
negative aspects of their actions in relation to their predetermined strategy. Unlike
DNPS, students were rewarded for their performance; trading reports submitted after
trading represented 25 percent of the total mark.
Each subject in our study acted as a dealer for a bank in one trading exercise.
However, foreign exchange trading is complex and the exercise was conducted as part
of a postgraduate finance program. Each subject was a member of a team of three
which acted as a bank. Each subject acted as a dealer once but was present in two other
sessions; once in the role of position keeper and once in the role of risk manager. The
roles reflect the reality of a trading floor; in this exercise, as well as reality, dealers were
constrained by the policies of their bank. The dealer was expected to trade within
the team’s agreed strategy, the position keeper was expected to input and match
transactions as soon as they were completed and the risk manager was responsible for
ensuring that the risk profile remained in accordance with the pre-agreed trading
strategy and trading limits before trading commenced. Profitability of the bank
represented 5 percent of the assessment for the subject; therefore, there was also an
incentive to act as a good team member.
Subjects commenced trading at a zero AUD and USD position. By the end of trading
they were expected to have a zero AUD position with a resultant USD profit or loss.
No trading limits were imposed on subjects, other than to have a zero trading position
at the end of trading. If this was not the case, the central bank closed them out at a 300
basis point penalty; there was a strong incentive for subjects to manage their position
in conjunction with the risk manager. Each week, prior to trading, banks (teams) were
required to develop and submit to the subject leader their strategy (based on economic
scenarios that are reproduced in Appendix) in writing. This required the development
of an economic and investment perspective about future events and how this may
affect price discovery and returns. Each scenario was different to ensure that, as far as
possible, trader’s responses would be unique and as closely determined by their
personality as possible. The measures we adopted to control for different scenarios are
discussed later in this section.
Price discovery occurred through “real time” prices displayed via computer screen.
Subjects were required to display two prices (buy/sell) on the screen at all times. They
were required to deal at the standard market parcel of AUD 10 m at their screen rate;
they could not refuse to deal. For amounts above AUD 10 m, the dealer’s price was
subject to negotiation or the dealer could refuse to deal; we identify transactions over
AUD 10 m and analyse them separately. Deals were completed by the dealer through
the real time pricing system or by telephone. All decision making was motivated by the
subject’s quest for financial profit within a risk/return profile they developed for
themselves. Once deals were completed they were passed to the position keeper
who input the transaction and ensured that the deal matched “real time” with the
RBF counterparty bank. The risk manager managed the exposure and passed information
5,2 to the dealer.
During the simulation news events were released on the dealers’ pricing screens.
The subject could not be influenced by fellow members of his or her bank, the position
keeper did not have access to this information on screen and the risk manager
could only view this information on a different screen. Some news events were relevant
110 to economic activity that should have influenced changes in the foreign exchange.
The time of the release of such data were known by the dealer prior to the
commencement of trading. Other news events that had little relevance to the price in
the foreign exchange rate (sporting and human interest events) were released
randomly and consistently to distract the dealer from their tasks. The history of the
exchange rate during one session and responses to news events, are illustrated
in Figure 1. Overreaction (underreaction) was measured by the subject’s price
adjustment one minute after the news release. If the subject’s response was more (less)
Rate Movement Tuesday, August 17, 2010

0.93
0.929
0.928 F H
0.927
0.926
0.925
0.924
0.923 G
0.922 B D
A C E
0.921
0.92
11:05 a.m.
11:11 a.m.
11:17 a.m.
11:23 a.m.
11:29 a.m.
11:35 a.m.
11:41 a.m.
11:47 a.m.
11:53 a.m.
11:59 a.m.
12:17 p.m.
12:23 p.m.
12:29 p.m.
12:35 p.m.
12:41 p.m.
12:47 p.m.
12:53 p.m.
12:59 p.m.
1:05 p.m.
1:11 p.m.
Market Average Bid Market Average Ask
Notes: The market average bid and ask rate as of August 17, 2010 is plotted.
Trading starts at 11a.m. and closes at 1.15 p.m. A total of eight news items
were announced during the trading session (labeled A-H). News A (actual
deficit is $25Blns) is announced at 11.15 a.m. News B (unemployment
rate is 8 percent) is announced at 11.30 a.m. News C (there is a rumor that
RBA committee will decrease the interest further by 1 percent in the next
quarter) is announced at 11.45 a.m. News D (the age: the aging population
and a sustained low fertility among populations are expected to lower our
growth significantly) is announced at 11.55 a.m. News E (Bloomberg: US
investment banks are facing with lowest profits in the history – the recent
low level of investors money inflow is reflecting the alarming fact that USA
is no longer a world financial hub) is announced at 12.25 p.m. News F (G8
meeting reconvenes for last session: likelihood of concert intervention in the
Figure 1. near future) is announced at 12.31 p.m. News G (Australian resources
Foreign exchange rate companies raise iron ore output by 11 percent this year to meet Chinese
movement as of August
17, 2010 demand) is announced at 12.36 p.m. News H (Japanese exit polls: no surprise!
Swing against ruling party from the poll) is announced at 12.45 p.m.
than the mean (or median) response, the subject is treated as overreacting Overconfidence
(underreacting) to the news. and overreaction
Like the differing economic scenarios, differing news items also required different
treatment. We follow DNS and DNPS and utilize a stepwise regression methodology to
examine whether there are relationships between the personality metrics and the
dependent variables. The stepwise regression methodology omits statistically
insignificant variables and, following the lead of DNS and DNPS, we deleted the 111
least significant personality variable in a regression until a model containing only
coefficients with p-values o0.10 was obtained. DNS utilize a stepwise approach as
they have a small sample. DNPS found that the stepwise approach was appropriate for
their data due to the relationships between the dependent variables (see Durand et al.,
2013, p. 11, footnote 14). Our data set is similar to that of DNPS; the interrelationships
between the dependent variables do not result in clear results when they are all
included in the analysis and therefore we also utilize a stepwise approach. In order to
examine whether different sessions affect results, we conduct the stepwise approach on
all variables, including dummy variables, for the sessions. We omit statistically
insignificant session dummies before conducting the stepwise analysis on the
personality metrics used as independent variables in our analyses. DNPS also conduct
separate analyses on subsets of male and female subjects as well as subsets of subjects
who are from Asian and non-Asian cultural backgrounds. DNPS state that the
analyses for these sub-groups do not result in materially different conclusions from
those reported in the main body of the paper and do not report these results. The ratio
of subjects from each gender to independent variables indicates that conducting
further analysis like DNPS is not appropriate given our sample size. Adding dummy
variables to capture gender and cultural differences without considering interactions
would also be inappropriate. Questions of the interaction of personality, gender and
culture is an important question which we, sadly, must leave to future research.
In the stepwise procedure, the resulting model after deleting insignificant variables
is considered the “best” one. In all cases we confirmed this by comparing the Akaike
information criterion with the next best model; in all cases, the model we present is
optimal by this criterion. Tobit regression, which allows for dependent variables to be
truncated, has been used to model the bid-ask spread and the number of transactions
over $10 m and in all of the overreaction analyses[5]. In the case of transactions over
$10 m, the summary statistics reported in Table II show that the minimum observation
for this observation is zero. In the case of the bid-ask spread, the theoretical minimum is
zero and, while the minimum value reported for the average bid-ask spread is not zero,
it is very small. Given the theoretical bound and the difficulties due to the dependent
variable approaching this theoretical boundary (Greene, 2003, Chapter 22), use of Tobit
analysis is advisable. In the case of the models of overreaction we study, the number
of reactions is standardized to percentage terms; this recognizes that the number of
opportunities for reaction differed between sessions. We model the number of
transactions using ordinary least squares regression. The z- and t-statistics, and resulting
p-values, reported in Table IV have been adjusted for heteroscedasticity.
Overconfidence
Overconfidence has proved a useful concept in explaining financial phenomena.
Glaser and Weber (2010) provide a useful overview of overconfidence; they report that
“Business Source Premier (EBSCO Host) shows 144 peer-reviewed journal articles
published in 2008 and 1,189 articles since 2000 [and] ScienceDirect indicates 250
RBF Bid-ask spread Number of transactions Transactions 4$10 m
5,2
Mean 0.000980 73 17
Median 0.000947 61 10
Maximum 0.002302 203 57
Minimum 0.000581 16 0
112 SD 0.000270 47 15
Skewness 2.2 1.4 1.2
Kurtosis 11.1 4.2 3.4
Jarque-Bera 216.7 23.7 15.1
p-value 0.0000 0.0000 0.0005
Notes: Summary statistics for the proxies for overconfidence which are the dependent variables in the
regression analyses reported in Table IV is displayed. The bid-ask spread is average bid ask spread for
each subject. The number of transactions is the number of times a subject traded in a session.
Table II. Transactions 4$10 m is the number of times a trader traded an amount 4$10 m (we refer to this
Summary statistics for dependent variable as transactions 4$10 m). Jarque-Bera is a test of the null hypothesis that the
overconfidence metrics distribution of observations conforms to a Gaussian normal distribution
peer-reviewed journal articles were published in 2008 and 1,556 articles since 2000”
(p. 241). In real, as opposed to experimental, markets, investors participate voluntarily.
Confidence in financial markets might be manifested in a number of ways. If
confidence can be understood to be an individual’s belief that he or she can choose the
best course of action, investors can be presumed to be confident in their abilities as
investors; it is doubtful that “underconfident” investors would enter into, or continue
in, markets[6].
Overconfidence is characterized by an individual’s belief that the precision of their
forecasts is greater than is actually warranted. We cannot measure overconfidence
directly given the experimental design we are utilizing. We are, however, able to
measure the manifestations of overconfidence. We follow Barber and Odean (2001), for
example, who have argued that excessive trading is a manifestation of over-confidence.
Overconfident investors engage in more trading. We capture the amount of trading of
our subjects in three ways:
(1) The average bid-ask spread for each trader. We refer to this variable as the bid-
ask spread. The bid-ask spread represents the liquidity the trader is willing to
provide to the market and a trader with a lower spread is assumed to be more
willing to trade than a trader posting a wider spread. A trader more willing to
trade is therefore taken to be a trader who is more confident than one who is
less willing to trade.
(2) The number of times a subject trades (we refer to this dependent variable as
number of transactions). The more times a subject trades, the more confident
we assume the trader is.
(3) The number of times a trader traded an amount 4$10 m (we refer to this
dependent variable as transactions 4$10 m). A trader trading $100 m is
therefore assumed to be more confident than a trader who might trade $10 m.
Summary statistics for these three overconfidence metrics are reported in Table II.
Bid-ask spreads are, on average, under one-tenth of an Australian cent but range from
over one-fifth of a cent to 6/100th of a cent; the subject we assume to be least willing to
trade posted a spread approximately four times that of the keenest trader. The average
(median) number of trades was 73 (61) but most of these transactions were small; the Overconfidence
average (median) number of trades over $10 m was 17 (ten). All of the overconfidence and overreaction
metrics are positively skewed.
Correlations between the overconfidence metrics are reported in Table III. Pearson’s
correlation coefficients are reported above the diagonal and Spearman’s rank
correlation coefficients are reported below the diagonal. The three metrics are designed
to proxy overconfidence yet the most striking aspect of Table III is that the proxies 113
do not exhibit the relationships that would be expected if the metrics were capturing
the same effect. There are no significant relationships between the bid-ask spread and
either of the transaction metrics. There is a slight negative correlation between the
number of transactions and the number of transactions over $10 m. Subjects seem to
have preferred a large number of smaller transactions over deals involving larger
amounts. Remember that deals over $10 m were subject to negotiation and this aspect
of the experimental design may have militated against larger transactions.
The findings reported in Table IV confirm that there is a relationship between

personality and overconfidence. Personality traits are found to have statistically
significant relationships with each of the dependent variables. The bid-ask spread
(the first equation) has statistically significant positive relationships with
agreeableness and masculinity. The bid-ask spread has a statistically significant
and negative relationship with extraversion. Bearing in mind that a lower (higher) bid-
ask spread is a proxy for overconfidence (underconfidence) our findings points to
overconfidence increasing with extraversion and decreasing with agreeableness and
masculinity. DNS (in their discussion of table VII of their paper) find that their subjects’
exposure to the stock market was positively associated with extraversion and
negatively related to agreeableness. DNS postulated that their finding for extraversion
was perhaps due to “[y] exposure to equities [giving] investors more to socialise
about” (p. 202). Additionally, DNS find that increasing extraversion is associated with
holding stocks with lower market capitalization. The relationships between
extraversion and agreeableness in this paper, however, suggest that the finding in
DNS may be interpreted as supporting a positive relationship of overconfidence to
exposure to the stock market. In addition to its association with sociability, research in
neurofinance has found evidence that extraversion is positively associated with reward
seeking (Peterson, 2010, p. 77).
The finding of a positive association of masculinity with the bid-ask spread
(i.e. higher masculinity is associated with less confidence) is at odds with Barber and
Odean (2001). Barber and Odean argue that masculinity is associated with greater
overconfidence but their argument is based on biological gender. The finding that
Bid-ask spread Number of transactions Transactions 4$10 m
Bid-ask spread 0.15 0.17

Number of transactions 0.29 0.21*
Transactions 4$10 m 0.20 0.27**
Notes: Correlation coefficients for the proxies for overconfidence which are the dependent variables in
the regression analyses reported in Table IV is displayed. Bid-ask spread, number of transactions and
transactions 4$10 m are defined in the text accompanying Table II. Pearson’s correlation coefficients Table III.
are reported above the diagonal and Spearman’s rank correlations below the diagonal. Correlations of
*,**,***Significant at the 10, 5, 1 percent level, respectively overconfidence metrics
RBF Dependent variable
5,2 Independent variables Bid-ask spread Number of transactions Transactions 4$10 m
Constant 0.000547 146.017900 10.982910

z(t)-statistic 1.9388 1.5796 0.4500
p-value 0.0525 0.1200 0.6527
114 Negative emotion 3.280859
z(t)-statistic 2.6664
p-value 0.0101
Extraversion 0.000012
p-value 0.0907
Openness to experience
z(t)-statistic
p-value
Agreeableness 0.000014 1.167496

z(t)-statistic 1.7755 2.4263
p-value 0.0758 0.0153
Conscientiousness 3.478960 1.449318
z(t)-statistic 2.6393 2.4305
p-value 0.0108 0.0151
Masculinity 0.000008 0.522408
z(t)-statistic 1.7563 1.7773
p-value 0.0790 0.0755
Femininity
z(t)-statistic
p-value
Preference for innovation 3.331258 0.624332
z(t)-statistic 2.8052 1.8985
p-value 0.0070 0.0576
Risk-taking propensity 2.392784
p-value 0.0662
Significant sessions 0 2 and 3 0
Summary statistics
R2 0.3036
R2 (adjusted) 0.2262
Reset (F-stat/p-value) 3.9234 (0.0025)
AIC 13.5181 10.3957 8.2514
Notes: Results for the optimal parsimonious variable analysis of the dependent variables proxying
for overconfidence – the bid-ask spread, number of transactions and transactions 4$10 m (defined in
the text accompanying Table II) – obtained using a backwards step-wise deletion procedure is
reported. The independent personality variables are described in the text accompanying Table I. For
the bid-ask spread and transactions 4$10 m, the models are run via Tobit methodology, with p-values
calculated using quasi-maximum likelihood standard errors that are robust to heteroscedasticity. For
number of transactions, the model is run via OLS regression methodology, with white
Table IV. heteroscedasticity adjusted p-values. Results of Ramsey’s RESET test (which is reported as an F-
Regression analyses statistic) are reported for the OLS regression only. “Significant sessions” indicates if a dummy variable
for overconfidence for a particular session was statistically significant at the 10 percent level
overconfidence has a negative relationship to overconfidence in our analysis of the

bid-ask spread is, however, consistent with the general finding for psychological
gender in DNS, where masculinity is associated with lower risk-taking and increasing
exposure to larger stocks.
The number of transactions (the second equation in Table IV) has statistically Overconfidence
significant positive relationships with negative emotion (neuroticism), and overreaction
conscientiousness and risk-taking propensity (although, in this case, the p-value is
0.0662). It has a negative relationship to preference for innovation. The variables
that are statistically significant for the number of transactions are not significant
in the analysis of the bid-ask spread and vice versa. That risk-taking propensity is
associated with overconfidence is perhaps not surprising; people who are not 115
confident about an activity are less likely to risk undertaking that activity (trekking in
the Himalayas is an example which comes to mind).
The number of transactions is the only dependent variable in common with this
paper, DNS and DNPS. DNS and DNPS find that personality is related to the number
of trades. DNS (table VIII, Equation (2)) also find a positive relation between negative
emotion and their dependent variable called number of times an investor trades.
DNS argue that “[y] it is probably unsurprising that investors with a greater
propensity for risk trade more often. That investors who are more anxious should trade
more is, however, more difficult to interpret. It might also be the case that anxiety
and nervousness are associated with greater levels of activity. We suspect that the
positive association of negative emotion to trading may be associated with an increased
propensity to respond to stimuli in a way that results in trading. If such stimuli
increase the psychological discomfort of neurotic investors, trading might be perceived
as a means to reduce these unpleasant feelings” (DNS, p. 202)[7]. Such a proposal,
however, while consistent with our data, is at odds with the findings of neurofinance
which associate neuroticism with loss avoidance (Peterson, 2010, pp. 77-78). DNPS (in
their table VIII) find, like us, a positive relationship of conscientiousness to trading,
which they suggest may be a function of the experimental design (as our student
subjects may associate increased trading with better performance in the exercise).
The analysis of number of transactions in Table IV also finds a statistically
significant and negative coefficient for preference for innovation. This result is
consistent with DNPS (in their table VIII, Equation (1))[8]. Given that preference for
innovation is associated with seeking out information to adapt to new opportunities,
higher preference for innovation may be associated with a more realistic appreciation of
one’s abilities (i.e. less overconfidence).
As we examine the third proxy for overconfidence, the number of transactions
4$10 m, there is a positive and statistically significant coefficient for preference for
innovation (the p-value is 0.0576)[9]. This finding appears inconsistent with the
findings discussed in the preceding paragraph (where preference for innovation was
negative). Once investors have chosen to trade larger amounts, it may be the case that
this process is facilitated by increasing information seeking and adaptation[10].
Consistent with the analysis for the bid-ask spread, we find agreeableness is also
statistically significant and positive for transactions 4$10 m[11]. Table III reveals that
transactions and transactions 4$10 m are negatively correlated. Thus variables
having different signs in equations which model variables which are negatively
correlated should not be unexpected.
Masculinity is positive and statistically significant for transactions 4$10m: the
greater an investor’s psychological masculinity, the greater is his or her confidence
ceteris paribus. This finding is not consistent with the role we find for masculinity in
the bid-ask spread. It is also inconsistent with the role for masculinity found in DNS.
It is, however, consistent with the role Barber and Odean find for biological gender
in their analysis of overconfidence. Indeed, in this study, positive coefficient for
RBF masculinity may be consistent with being task focussed; larger trades may help “get
5,2 the job done.” We leave this tension unresolved for the moment but refer to it in the
meta-analysis discussed below.
The three proxies used for overconfidence – the bid-ask spread, number of
transactions and transactions 4$10 m – are not positively correlated as might be
expected if they are capturing a common underlying reality. All are plausible metrics
116 for overconfidence. We remain agnostic on the question of which might be the best.
None the less, the findings in this section indicate that these proxies are associated with
personality metrics. The relationships between the overconfidence proxies and
personality were found to constitute evidence in support of DNPS’ argument that
investors with particular personality traits are the marginal price setters in financial
markets. Furthermore, not only are we able to establish links, the analysis in this paper,
along with evidence provided in DNS and DNPS, allows us to begin to develop
hypotheses on why these personality constructs are linked to overconfidence.
Overreaction and underreaction

Like overconfidence, over, and under, reaction, has been the subject of behavioral
models and empirical work. For example, we have already noted how Jegadeesh and
Titman (2001) use overreaction to explain the presence of momentum in financial
markets and that Hong et al. (2000) use underreaction to model momentum.
Overreaction and underreaction can be illustrated using an example from the
experiment we conduct. Consider a situation where a subject’s quote is the same as the
market average, say 0.7352/0.7357. In this case, the subject is offering to buy one
Australian dollar for US$0.7352 (the bid) and sell one Australian dollar for US$0.7357
(the ask). If there is good news about the Australian dollar, the quotes should go up.
If there is bad news, the quotes should fall. If there is good news, for example, and the
market average bid price goes to 0.7355, the subject is categorized as overreacting if
she posts an ask of 0.7356. Conversely, she is considered to underreact if her quote is
below the market average, for example, if she posts 0.7354.
Subjects in this study, as we have discussed above, participated in a simulated
foreign exchange market. In each of the markets we conduct, news (stimuli) was
presented to subjects and they were able to respond to this news. To measure
overreaction we observed each subject’s response within one minute of the
announcement of the news. If the subject’s response was greater than the mean
(median) response in the session, we categorized the response as overreaction (and
coded it with a variable taking the value of 1); if the subject’s response was below the
mean (median), we categorized the response as an underreaction (and coded it with a
variable taking the value of 0). For example (using, for simplicity, only one quote rather
than a bid and an ask), let us assume that the market responds to good news by
pushing the exchange rate from 0.73 to 0.74; a trader quoting 0.75 has overreacted
and a trader quoting 0.735 has underreacted. If there is bad news and the quote
moves to 0.72, a trader moving to 0.71 has overreacted and a trader quoting 0.725
has underreacted. There are x items of news in each session. To reduce the noise
in the analysis, our analysis of overreaction focussed on each subjects’ propensity
to overreact by summing the variables assigned to each response (i.e. 1 or 0). Therefore,
in each session, each subject generates a score between 0 (which indicates that
the subject always underreacts) and x (which indicates that the subject always
overreacts in that session). To standardize the scores between sessions, we divide
x by the number of items of news in a session (n); the resulting ratio (x/n) takes
the value between 0 (if a subject never overreacts) and 1 (if a subject always Overconfidence
overreacts). We also categorized the stimuli into good and bad news events and and overreaction
conduct the study using two additional metrics: the propensity to overreact to good
news and the propensity to overreact to bad news. Summary statistics for the
overreaction are presented in Table V; maximum values of 1 and minimum
values of 0 indicate that some subjects overreacted (underreacted) to particular
types of news. 117
The findings reported in Table VI confirm that there is a relationship between
personality and overreaction. Personality variables are found to have statistically
significant relationships with each of the dependent variables. We note, however,
that when the average reaction within one minute is used as a benchmark, no
variable was found to have a statistically significant relationship with good news
and, therefore, no analysis is reported for this dependent variable. All of the
analyses reported in Table VI are Tobit as the dependent variable is bounded between
0 and 1.
Extraversion is found to have a statistically significant and negative relationship
to overreaction to all items of news when overreaction is measured both by the
benchmark of average and median reaction (Equations (1) and (3)). As an investor
becomes more extraverted, the less likely he or she is to overreact to news,
ceteris paribus. We do not see a role for extraversion when we dichotomize news into
good and bad announcements.
When average reaction to all news is the dependent variable, agreeableness is also
found to have a positive and statistically significant relationship with the dependent
Where the benchmark Where the benchmark

is the average reaction is the median reaction
Overall Good news Bad news Overall Good news Bad news
Mean 0.40 0.34 0.26 0.29 0.22 0.21

Median 0.39 0.38 0 0.29 0.26 0.22
Maximum 0.75 0.75 1 0.52 0.75 1
Minimum 0.08 0 0 0.08 0 0
SD 0.1 0.2 0.3 0.1 0.2 0.2
Skewness 0.4 0.2 1.2 0.2 0.3 1.1
Kurtosis 3.2 2.0 3.3 2.7 2.5 4.9
Jarque-Bera 1.5 3.4 15.5 0.5 1.7 21.3
p-value 0.4656 0.1867 0.0004 0.7617 0.4216 0.0000
Notes: Summary statistics for standardized scores for overreaction (the dependent variables in the
regression analyses reported in Table VI) is diaplayed. To measure overreaction we first observe each
subject’s response within one minute of the announcement of the news. If the subject’s response is
greater than the mean (median) response in the session, we categorize the response as overreaction
(and code it with a variable taking the value of 1); if the subject’s response is below the mean (median),
we categorize the response as underreaction (and code it with a variable taking the value of 0). There
are x items of news in each session. In each session, each subject generates a score between zero (which
indicates that the subject always underreacts) and x (which indicates that the subject always
overreacts in that session). The standardized scores result from dividing x by the number of items of
news in a session (n); therefore, the resulting ratio (x/n) takes the value between 0 (if a subject never
overreacts) and 1 (if a subject always overreacts). We also categorize the stimuli into good and bad Table V.
news events and this table includes summary statistics for these variables. Jarque-Bera is a test of the Summary statistics for
null hypothesis that the distribution of observations conforms to a Gaussian normal distribution overreaction metrics
RBF Dependent variable
5,2 Where the benchmark Where the benchmark
is the average reaction is the median reaction
Independent variables Overall Bad news Overall Good news Bad news
118 Constant 0.438411 1.172440 0.439405 0.095991 0.668757

z-statistic 4.0510 1.8795 5.7384 0.4076 3.0382
p-value 0.0001 0.0602 0.0000 0.6836 0.0024
Negative emotion
z-statistic
p-value
Extraversion 0.005253 0.003537
z-statistic 1.9128 1.9119
p-value 0.0558 0.0559
Openness to experience 0.012223

z-statistic 1.7364
p-value 0.0825
Agreeableness 0.005358
z-statistic 1.9832
p-value 0.0473
Conscientiousness
z-statistic
p-value
Masculinity
z-statistic
p-value
Femininity
z-statistic
p-value
Preference for innovation 0.012132
z-statistic 1.8268
p-value 0.0677
Risk-taking propensity 0.040847 0.018332
z-statistic 1.8516 2.3343
p-value 0.0641 0.0196
Significant sessions 4 and 6 0 0 0 0
Summary statistics
AIC 0.9807 1.9181 1.5605 0.8854 0.2102
Notes: Results for the optimal parsimonious variable analysis of the dependent variables capturing
overreaction (discussed in the text accompanying Table V) obtained using a backwards step-wise
deletion procedure is reported. The independent personality variables are described in the text
accompanying Table I. The models are run via Tobit methodology, with p-values calculated
Table VI. using quasi-maximum likelihood standard errors that are robust to heteroscedasticity. “Significant
Regression analyses sessions” indicates if a dummy variable for a particular session was statistically significant at the
for overreaction 10 percent level
variable. Overreaction increases as an investor becomes more agreeable. Individuals

who score highly on the agreeableness value respect the beliefs of others. Consequently,
their overreaction might be seen as excessive agreement with the perceived consensus.
DNPS also find a statistically significant and positive relationship of agreeableness
to the disposition effect (but only in a subject’s second trade – see Durand et al.,
2008, table X).
Risk-taking propensity is found to have a statistically significant and negative Overconfidence
relationship to overreaction to items of bad news when overreaction is measured by the and overreaction
benchmark of average and median reaction (Equations (2) and (4)). Investors who are
less willing to commit to a decision that could either lead to success or failure are more
likely to overreact to bad news.
As we have noted, no variable was found to have a statistically significant
relationship with good news and, therefore, no analysis is reported for this dependent 119
variable. Where median reaction is used as the benchmark for overreaction, preference
for innovation is found to have a significant and negative relationship while openness
to experience is found to have a statistically significant and positive relationship to
overreaction. The analysis of number of transactions in Table IV also finds a
statistically significant and negative coefficient for preference for innovation and we
argue that, in that instance, seeking information and adapting is associated with
a more realistic appreciation of one’s abilities (i.e. less overconfidence). In the case of
overreaction to good news, it would also appear that, if preference for innovation is
involved in a more realistic approach, subjects may not overreact to bad news.
The relationships between measures of overreaction and personality were found to
constitute evidence in support of DNPS’ argument that investors with particular
personality traits are the marginal price setters in financial markets. DNPS find that
subjects’ personalities are related to their use of the availability heuristic and their
propensity to be influenced by the disposition effect. This study adds overconfidence
and overreaction to the list of behavioral biases with personality at their core.
A meta-analytical basis for a theory of personality and finance

This study, like DNS and DNPS, focusses on personality as the key driver for the
explanations that have been used to explain financial phenomena. It is now clear
that personality is associated with the choices investors make. Furthermore, it is clear
that investors’ personality drives phenomena, such as overconfidence and
overreaction, which behavioral finance has used to model movements in the market.
These three studies have utilized personality traits to address the “big picture”
question of whether personality is associated with investment. None of these papers
has proposed a priori theories about how each trait might relate to the finance
phenomena studied; this is simply not required to address the big picture of whether
personality is related to investment. This paper, DNS and DNPS have proposed ad hoc
explanations to help interpret their findings. The question as to whether theories about
how each personality trait can be proposed has been, to now, left open.
In total, DNS, DNPS and the current paper have conducted a total of 34 analyses
using a financial phenomenon as a dependent variable and Norman’s Big Five, Bem’s
sex roles and two traits from Jackson’s personality inventory as independent variables.
The results of these 34 experiments are summarized in Table VII. All three papers have
reported p-values o10 percent in their preferred models and we use “ þ ” to denote
where a statistically significant and positive effect has been found at the 10 percent
level and “” where a statistically significant negative effect has been found. The
analysis adopted on the basis of the summary of results reported in Table VII
categorizes each variable as either being “significant or insignificant” and treats these
results as a “yes or no” dichotomy which can be analyzed using the binomial
distribution. The significant/insignificant dichotomy we initially adopt is independent
of the sign the significant trait takes (either positive or negative): we will utilize the
pattern of positive and negative results in the following paragraph to guide us on how
5,2
120
RBF
Table VII.
Meta-analysis
Norman’s Big 5 Bem Jackson
Overconfidence
Bid-ask spread þ þ
Number of transactions þ þ þ
Transactions 4$10m þ þ þ
Overreaction
All news (average) þ
All news (median)
Good news (median) þ
Bad news (average)
Bad news (median)
Durand et al. (2008)
Information seeking using
Television þ þ þ
Investment forums þ þ
Investment advice þ þ
Financial publications þ þ
Investor choices
Portfolio exposure þ
Number of trades þ þ
Proportion of portfolio þ þ
traded
Proportion of shares in þ þ
largest 10% of ASX stocks
Proportion of shares in þ
largest 20% of ASX stocks
Investment outcomes
Total return þ þ
Monthly sharpe ratio þ þ
Daily sharpe ratio þ þ
SD þ þ þ þ
(continued)
Norman’s Big 5 Bem Jackson

Durand et al. (2013)

Heuristics
Salience (the availability þ þ
heuristic)
Disposition effect
(1st trade):
Net realized gain þ
Proportion of gains þ
realized
Proportion of losses þ þ
realized
Disposition effect
(2nd trade)
Net realized gain þ þ
Investment choices
Herfindahl (diversification) þ
Size þ
Short momentum
Long momentum þ
Risk (b) þ
Investment outcomes
Number of trades þ
Portfolio return þ þ
R2 þ þ
Number of significant 14 14 5 7 11 12 7 11 17
observations
Notes: þ , an experiment where a p-value o10 percent has been reported in the preferred models in that paper; , is used where a statistically significant negative effect has been
found. The 34 analyses of investment presented in Durand et al. (2008) (DNS) and Durand et al. (2013) (DNPS) is summarized. Negative emotion, extraversion, openness to experience,
agreeableness, conscientiousness, masculinity, femininity, preference for innovation and risk-taking propensity are described in the text accompanying Table I
Overconfidence
and overreaction
Table VII.
121
RBF we might expect the trait to function in financial decision marking. Using a 10 percent
5,2 level of significance, and a simplifying assumption that each test of each trait is
independent, we would expect to find about three significant results by chance. Using
two standard deviations from the expected value as a benchmark, seven significant
observations for any variable would be more than might be expected from simple
random draws; nine significant observations are more than would be expected if a cut
122 off of three standard deviations from the expected value was adopted[12]. Therefore,
the use of the binomial distribution can inform us if the traits that have been utilized in
the analyses are found to be significant in more instances than might be expected
given a random draw. Further, the number of times a personality trait is found to be
significant serves as a benchmark for its importance. Risk-taking propensity, with 17
significant occurrences, occurs most often in significant roles in explanations of the
dependent variables. Following this, with 14 significant observations, we find negative
emotion and extraversion. Masculinity has 12 significant occurrences, preference for
innovation and conscientiousness have 11 and agreeableness and femininity each have
seven. While we have been reluctant to hypothesize about the relationships between
the traits and financial phenomena, the summary in Table VII may help us develop
such theories a posteriori.
Standard (i.e. non-behavioral) finance is based on risk-aversion. Indeed, an
investor’s attitude to risk is the only psychological notion which standard economics
entertains. Risk-taking propensity focusses on financial risk (Stewart et al., 2003) and it
is unsurprising that the psychological construct works in the three studies much as
would be expected from a risk-averse or risk-seeking individual. On the basis of the
three studies, risk-taking propensity can be expected to be positively associated with
investment decisions associated with riskier behavior. Higher (lower) risk-taking
propensity will be associated with higher (lower) exposure to risk. DNS document that
there is a positive association between risk-taking propensity and the standard
deviation of the portfolios of the investors they study. Risky behavior is not simply
defined by exposure to risk which might be captured by a portfolio’s variance or
exposure to prima facie riskier asset classes such as smaller stocks (Berk, 1995; Durand
et al., 2007). DNS find that higher risk-taking propensity has a negative relationship to
exposure to larger stocks. Risky behavior might also consist of trading more (as is the
case in this paper and DNS) or deviating from a benchmark (as DNPS find in their
analysis of R2). If investors scoring highly on risk-taking propensity are the marginal
price setters in the market, we would expect demand to be higher for riskier portfolios.
Rather than risk aversion, risk-taking propensity might be used to explain the positive
relationship between the equity risk premium and risk (Merton, 1980; Lundblad, 2007;
Müller et al., 2011). Variation in the size-premium, as documented by Durand et al.
(2007), where emotional arousal is used to explain the variation in the size-premium
and its positive association with trading activity, might also be better explained by the
marginal price being set by investors scoring highly on risk-taking propensity.
People who rank highly on negative emotion have a propensity to “experience
negative feelings such as embarrassment, guilt, low self-esteem, emotional instability
and pessimism” (Durand et al., 2008, p. 194). The meta-analysis presented in Table VII
suggests that its role in financial markets is complex: we find both positive and
negative relationships between negative emotion and the phenomena modeled.
Negative emotion appears to have a positive association to reliance on information.
DNS find a positive relationship of negative emotion and reliance on investment advice.
DNPS find a positive relationship of negative emotion and reliance on the disposition
effect. On balance, negative emotion tends to have a positive relationship to risk Overconfidence
although the picture is complex. DNS find a positive relationship between negative and overreaction
emotion and the standard deviation of portfolios. DNPS find a positive association
between negative emotion and the b of a subject’s portfolio. DNS also find that
investors scoring higher on this scale hold smaller stocks, although DNPS find the
opposite. The picture is also complex with respect to trading activity. This paper and
DNS find a positive association between negative emotion and trading activity, while 123
DNPS find the opposite. Neurotic investors are attracted to risk, perhaps unwittingly,
but find such exposure disturbing.
Extraversion is associated with sociability and, as we have noted above,
neurofinance has found evidence that extraversion is positively associated with
reward seeking. In DNS, this trait has been found to have a positive association to
exposure to the stock market, greater exposure to smaller stocks, higher returns
(and risk-adjusted returns) and, in this paper, underreaction and overconfidence. The
negative coefficient for extraversion reported when the bid-ask spread is used as a
proxy for overconfidence is interpreted as a positive relationship between extraversion
and overconfidence: lower spreads are associated with greater overconfidence.
Extraversion would appear to play an important role in investors’ entry and exit
decisions into the market and asset classes. It may prove to be the case that extraverted
investors are likely to be in the market but, as returns increase, investors scoring
progressively lower on extraversion may be tempted into the market. An association of
market exposure with extraversion may explain increasing market participation when
returns are increasing.
Masculinity, the trait that captures being focussed on tasks, is found to be associated
with less exposure to risk. DNS find that masculinity is associated with lower standard
deviations in the portfolio as well as increased holdings of larger stocks. They also find
masculinity is associated with lower exposure to the equity market. Although there is
evidence that masculinity is also associated with increased trading which this paper
has argued is in keeping with overconfidence, it might also be a function of rebalancing
portfolios toward lower risk positions. Where we argued that negative emotion is a
potentially destabilizing influence on markets, masculinity appears a stabilizing
influence. If investors scoring highly on masculinity are the marginal price setters in the
market, we might expect them to be involved in driving flights to quality (Abel, 1988;
Barsky, 1989; Durand et al., 2010). As we have noted, however, we have been unable to
consider any interactions between psychological and biological gender. Although
DNPS argue that their findings are robust to these considerations, it might be best to
leave more detailed consideration to future research.
Preference for innovation has been associated with higher returns (in DNS), higher
risk-adjusted returns (in DNPS). In both DNS and DNPS, preference for innovation has
been found to be associated with lower levels of trading. DNPS find positive and
negative relationships between preference for innovation and the disposition effect
which is difficult to interpret. Investors with high preference for innovation should
be able to monitor and be open to adopting the innovations necessary to adapt to
changes in their environment (Welsch and Young, 1982). Preference for innovation, like
risk-taking propensity, appears to have a role which influences investors toward
economically rational (i.e. risk averse wealth maximization) behavior.
Conscientiousness, with 11 significant observations in the 34 studies, is three
standard deviations above the expected value, yet it is the variable which this paper
and DNPS have suggested should be interpreted with caution. In both this study and
RBF DNPS, students are used as subjects. It may be the case that conscientiousness is a trait
5,2 which may be exaggerated due to the experimental design adopted in these papers.
If the results regarding conscientiousness are generalizable, it would appear that it may
be associated with a propensity to reduce exposure to risk.
Agreeableness and femininity each have seven significant occurrences and are
therefore two standard deviations from the expected value. Agreeableness was found,
124 in this paper, to be associated with overconfidence, but the associations found in
DNS and DNPS are difficult to interpret and, therefore, we are reluctant to hypothesize
about this variable at present. Bem’s sex role of femininity is found to be associated
with seeking information, choosing larger stocks, a greater reliance on the availability
heuristic and lower diversification. Investors scoring highly on the trait of femininity
may wish to hold securities that they know; as such femininity may be associated
with following trends or herding. As we discussed in our considerations of masculinity,
however, further research is required on the relationship of biological and
psychological gender before we feel comfortable about theorizing in this area.
Conclusion
Friends, lovers, careers and even your choice to read this paper (unless your
professor has forced you) are strongly influenced by the sort of person you are.
Personality, the essence of who you are, is at the core of many, if not all, decisions.
Financial decisions are important decisions. The core research question examined
in this paper has been whether personality drives investment decision making
and outcomes.
We follow DNS and DNPS in using Costa and McRae’s (1992) operationalization
of Norman’s (1963) “Big Five” (negative emotion, extraversion, openness to experience,
agreeableness and conscientiousness), Bem’s (1977) psychological gender traits
(masculinity and femininity) and Jackson’s (1976) personality traits of preference for
innovation and risk-taking propensity to model the personalities of the 61 subjects
engaged in a foreign exchange trading exercise. Our analysis confirms that personality
is associated with overconfidence and overreaction.
Finding that personality is linked with overreaction and overconfidence supports
DNS’ and DNPS’ findings that personality is associated with investment decisions and
outcomes. DNPS’ findings that personality traits are associated with the availability
heuristic and the disposition effect support the auction interpretation of analyses of
personality and investment: “investors with particular personality traits are the
marginal price setters for securities with particular traits” (Durand et al., 2013, p. 2).
The availability heuristic, the disposition effect, overreaction and overconfidence are
predominant phenomena utilized in behavioral finance to explain financial markets.
The evidence in DNS, DNPS and this paper is that behavioral finance has focussed on
epiphenomena. Understanding personality is at the core to developing a coherent
theory of finance from well-grounded behavioral underpinnings.
This paper, DNS and DNPS have addressed the question of whether personality per
se is associated with investment. All three papers have recognized the difficulty of
developing a priori hypotheses about which particular traits might influence
investment and, if a trait influences investment, how might it do so. This paper utilizes
the 33 analyses presented in DNS, DNPS and in this paper to conduct a meta-analytical
analysis of the personality traits used in these studies. This analysis indicates that the
important traits for behavioral finance are (in order of their suggested importance) risk-
taking propensity, negative emotion, extraversion, masculinity, preference for innovation,
conscientiousness, agreeableness and femininity. A posteriori theories for the influence Overconfidence
of these traits are then proposed. and overreaction
This paper, DNS and DNPS convey a challenge to future research in behavioral
finance. The claim that personality is the driver of investment behavior is far reaching
yet testable. This paper, DNS and DNPS have tackled a limited, though important,
subset of the behavioral phenomena utilized in finance; more can be tested.
Research on personality and finance requires data on individuals’ transactions and 125
their personality traits. DNS utilize actual investors and their observable transactions.
Their small sample illustrates the difficulty of obtaining such data. DNPS utilize
student subjects and obtain a larger sample. DNPS seek to replicate the real investment
behavior studied in DNS by using prices taken “live” from the Australian Stock
Market. This study also uses student subjects to obtain a workable number of
observations. In contrast to DNPS, our subjects interact with each other in a clinical
setting to create a market in which prices rise and fall in response to news, subjects’
expectations and their trading positions. We have utilized a clinical setting to create
a market but, unlike purely experimental work, we do not control the price stimuli
to which subjects respond. Future research might be usefully conducted focussing
on the effect of these variables in purely experimental settings. To our mind, a
challenge in purely experimental work will be to create settings that reflect the
market conditions whereby researchers can relate to personality traits and reach
generalizable conclusions.
Traits which are taken from Norman’s Big Five – negative emotion, extraversion and
conscientiousness – may be further decomposed into sub-traits (using more detailed
questionnaires) which may result in a more detailed understanding about why and
how these variables influence investment decisions and, through these decisions, the
often-dramatic movements of financial markets. Furthermore, consideration of the
interaction of personality and situations would be of interest: are the effects of
personality traits stable or do they vary by situation.
Acknowledgement
The authors have benefited from comments and suggestions from Graeme Harrison
and seminar participants at the Academy of Behavioral Finance and Economics
(Los Angeles, September 2011), Curtin University, Colorado State University, the
University of Otago and Macquarie University. The authors are particularly grateful
for the helpful comments received from the referee of the paper.
Notes
1. It is important to note that there are also a considerable number of competing explanations
that are not behavioral. Conrad and Kaul (1998) have argued that momentum captures
cross-sectional variation in expected returns; that is, momentum is a function of risk.
Moskowitz and Grinblatt (1999) argued that momentum is a function of shared industry
classification. Lesmond et al. (2004) contend that momentum is illusory and that any attempt
to exploit the phenomenon would not be profitable due to high trading costs. Chordia and
Shivakumar (2002) consider whether momentum is a function of state variables capturing
the business cycle. In the cases of Conrad and Kaul (1998), Chordia and Shivakumar (2002)
and Lesmond et al. (2004) assumptions are still made about what motivates investors and, if
our argument is sound, what is found to motivate investors setting prices in these scenarios
should be a function, in some way, of their personalities.
2. We discuss below how these traits are measured.
RBF 3. In total, 69 students completed the questionnaires. Four had missing student numbers (and
could not be matched with the trading data), three had missing items and one student
5,2 completed the form but did not complete the trading exercise.
4. The university is a member of the “Group of Eight” (Go8) (see www.go8.edu.au). DNPS also
study subjects enrolled at a Go8 university (although not the university in which the subjects
in this study were enrolled).
126 5. As DNPS remind us that “although Tobit has a superficial resemblance to ordinary least
squares regression, the maximum likelihood estimation procedure used for estimation means
that the value of R2 is not valid” (Durand et al., 2013, p. 14, footnote 12).
6. Bitmead et al. (2004) link exposure to the internet bubble to overconfidence, arguing
that “[y] the role of overconfidence before the Crash should not be surprising. Investors
without adequate levels of confidence probably wouldn’t have been in the market [y]”
(p. 168).
7. DNS find that, contrary to their expectations, extraversion has a negative relationship to the
number of shares traded. We do not find a statistically significant relationship between
extraversion and number of shares traded in this study.
8. DNS find a marginally significant negative relationship of preference for innovation to
number of trades (their table VIII, Equation (1)) but the variable does not survive in their
preferred equation.
9. There is evidence of non-linearity in the analysis of number of transactions: the reset test is
statistically significant. Consideration of non-linear transformations of variables found to be
significant in both the model of number of transactions and transactions 4$10 m did not
result in a resolution of this issue. We reiterate that the standard errors used to make
inferences about the significance of variables are adjusted for heteroskedasticity and,
therefore, allow us to make robust inferences about the variables.
10. In Table II the correlations reported for number of transactions and transactions 4$10 m are
negative. The differing signs for preference for innovation may be related to this negative
relationship.
11. This finding might be a function of the experimental design. These transactions had to be
negotiated and it simply may be the case that subjects who are more agreeable are more
likely to reach a deal when negotiation is required.
12. We use a binomial distribution as our rule of thumb. The expected value (mean) of a
binomially distributed variable is a function of the number of trials (n ¼ 34 in this case) and
the p-value (p) chosen (in this case 10 percent): np ¼ 34 0.1 ¼ 3.4. The variance of a
binomially distributed variable is given by np(1p) which is 34(0.1)(10.1) ¼ 3.06 and the
standard deviation is therefore O3.06 ¼ 1.75. A binomial distribution is applicable when
the n trials are independent and we note that this may not be the case in the studies
we analyse; our emphasis in the text is that we are using the distribution only as a rule
of thumb.
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Appendix. Economic scenarios used in the foreign exchange trading exercises

Economic scenario 1 (Tuesday, August 17, 2010)
Overseas movements have been the key influences over the past few weeks. On the eve
of elections in Japan, opinion polls were showing swings against the ruling party, which has
held government for the past 50 years. This political uncertainty has caused resurgent interest
in the relatively safe Australian dollar. In this environment the market has been easily
swayed to excesses over relatively trivial news. Along with the Australian dollar, the UK
pound has been viewed as a safe haven. In the same context, news in the USA and Japanese
markets could radically affect the international climate. Many traders appear to be trading
on the basis of waves of rumors sweeping the market pending the outcome of today’s
G-8 meeting in Bangkok. Locally there is growing concern over how the government will
act in order to prevent an overseas-fuelled blow out of the Australian economy, with its
implications for inflation. The CBM and the political arena are being closely monitored
by the market. The key economic indicators will be the balance of payments and unemployment
figures.
Market information from CBM economic & forecasting department Overconfidence
Rates:
and overreaction
. AUD exchange rate: Close: TBA High: TBA Low: TBA
. AUD cash rate: TBA
. USD cash rate: TBA
129
The following announcements are expected during the trading session.
Trading commences
Balance of payments Expected deficit ¼ $5 Bn
Unemployment figures Expected annual rate ¼ 7.5 percent
Trading halts for mid session break
Trading re-commences
G-8 meeting reconvenes for last session

Japanese exit polls due Expected swing against ruling party
Book squaring time
Trading ceases
Economic scenario 2 (Wednesday, August 18, 2010)

Recently improved performances in the areas of CPI and the balance of payments have lead to a
growing market sentiment that monetary policy will soften. Market players are watching the
RBM closely for any move toward a loosening of monetary policy. Many analysts suggest that a
monetary policy easing will be pre-empted by a statement from the political arena. Political
analysts suggest that the source of such an announcement will be a strong indicator to possible
leadership challenges arising from the hotly debated aboriginal land title issues. In this context
the Tokyo market will be closely monitoring Australian conditions. The possible weakening of
Australian interest rates, when combined with the recent strengthening of the US economy, has
lead to some players suggesting the possibility of Japanese “hot” money leaving the country.
Tokyo is cautiously nervous with regard to the US political climate, and so a flight of funds from
Australia may be aborted by events in the USA. In this environment the key indicators will be the
CPI figures and balance of payments results. US’s interest rates will bear monitoring.
Market information from CBM economic & forecasting department
Rates:
The following announcements are expected during the trading session.
Trading commences
Balance of payments Improvement likely. Expected deficit ¼ $5 Bn
US president in Hong Kong US president to address Banking Conference in
Hong Kong
Consumer price index Expected annual inflation rate ¼ 2.6 percent
Press club The treasurer is to address Press Club on “Australia
as an International Competitor”
Book squaring time
Trading ceases
RBF Economic scenario 3 (Tuesday, August 24, 2010)
The over-heated Australian economy has peaked and is now beginning a sharp decline. Behind
5,2 the official statistics the economy may well be heading into a recession during the coming years.
Drought-like conditions along with the harsh reality of a downturn in the building sector has left
many domestic investors feeling uneasy. A Treasury report about the performance
of the Australian economy in the last three months suggests that large-scale manufacturing
has risen by only 3.4 percent against 5.2 percent during the same period last year. The CBM
130 is concerned about inflationary pressures in the short term. Despite the beginnings of a
downturn, the CBM has been reluctant to rule out a further interest rate rise, despite the
strength of the AUD against the greenback. The key economic indicators will be the new
housing loan approvals, unemployment and inflation figures, which are expected to be released
today.

Rates:

. AUD cash rate: TBA USD cash rate: TBA. The following announcements will be made
during the trading session.
Trading commences
Balance of payments Expected deficit ¼ $3 Bn
Unemployment figures Expected annual rate ¼ 4.5 percent
New housing loan approvals Expected to decrease by B2.5 percent
Book squaring time
Trading ceases
Economic scenario 4 (Wednesday, August 25, 2010)

The last formal statement by the CBM on the state of the Australian economy implied
growth projections had been lowered. Since then, the external economic environment seems to
look more promising. Domestically, agricultural performance seems set for a distinct
improvement given the expected green light regarding free trade with the USA. The rate of
inflation seems to be under control and showing no cause for alarm. The Australian economy is
expected to expand at an average annual rate of 4-5 percent over the next quarter. Job creation is
at its highest level since the threat of recession, with 25,000 new jobs having been created over
the past three months. Recent education policies have just been supported by the Senate, which
has resulted in a 25 percent increase in tuition fees across the board at all of Australia’s leading
universities. With things going fine the CBM has no reason to feel under pressure to lower
interest rates. Last month the chairman of the US Federal Reserve Ben Bernanke announced
that US interest rates would not be lowered for a considerable period. In this environment the
key indicators will be the CPI figures and balance of payments results. US’s interest rates will
bear monitoring.

Rates:
. AUD cash rate: TBA Overconfidence
. USD cash rate: TBA and overreaction
The following announcements will be made during the trading session.
Trading commences
Balance of payments Improvement likely. Expected deficit ¼ $3 Bn 131
Press release US Federal Reserve Chairman Ben Bernanke likely to
revise outlook to “US interest rates will not be lower in
immediate future”
Press release Australian PM is to address the Press Club on

“Free Trade deal with US”
Book squaring time
Trading ceases
Economic scenario 5 (Tuesday, August 31, 2010)

While in recent times the US economy has been struggling, it is expected once geopolitical
tensions over the conflict in Iraq start to dissipate the US economy will return to a recovery mode
on the back of a global recovery. Global economic growth is anticipated to stand at roughly 2.1
percent. The path to full recovery will be uneven, as some economies will experience sub-par
quarters, particularly those economies in the South Pacific which are heavily reliant upon
agriculture as a leading export. The long drought experienced over the past three to four years is
starting to take effect. In the USA it is expected that economic growth will lead the way with next
quarter’s expectations of growth advancing 4.9 percent and unemployment remaining in the
stable range of 5.75-6 percent.
The Australian economy that was once seen as a safe-haven for investors has recently
released some negative sentiment to the global market regarding the medium to long term.
Economic growth expectations for the next 12 months is estimated at 3.5 percent and uncertainty
exists in regards to what the CBM’s next move will be regarding interest rates. To add to the
confusion regarding the future direction of the Australian economy conflicting rumors abound
regarding the health of the Australian prime minister. The official stance is that the PM is on
leave and that acting PM will be the Hon Peter Costello. In this environment the key indicators
will be the CPI and unemployment figures and retail sales over the past three months that are all
due for release today. US interest rates will bear monitoring. The acting PM has also called for an
urgent meeting with the press today.

Rates:

RBF The following announcements will be made during the trading session.
5,2
Trading commences
Retail sales figures released Expected increase of about 1.5 percent
132 Trading re-commences
Unemployment figures Expected unemployment ¼ 6 percent
Press Club Press conference with the acting PM, the Honorable
Peter Costello
Book squaring time
Trading ceases
Economic scenario 6 (Wednesday, September 1, 2010)

Australian financial markets have been bullish during the past few weeks in the wake of recent
economic news releases.
. Business confidence levels are at an all time high after a recent survey of company
executives.
. Retail expenditure has been steadily increasing over the past 15 months as consumers regain
confidence in the economy.
. Job creation is at its highest level since the beginning of the recession with 150,000 new jobs
created in 2010.
. Commodity prices are set to increase across the board in the next few months in the wake of
recent worldwide terrorist activity which has devastated worldwide commodity resources.
However, all is not as straightforward as it seems, with focus on exchange rates and
inflation rates having a key effect on short-term interest rates. The governor of the CBM has
stated it will “use any means necessary” to keep the AUD within an acceptable band during the
next few weeks of volatile trading. In addition to this, key inflation figures due within the
coming weeks will also influence interest rates, with the government keen on keeping
inflation under 3 percent.
Of immense global importance is the impact of the escalating conflict in the Gaza Strip.
In recent weeks over 600 people have been killed as a result of terrorist activity in the
region. Arab and North African leaders have officially voiced their concern to the UN while
the Islamic Resistance Movement (HAMAS) has threatened action against Israel and all her
supporters.
Markets will also be carefully monitoring the testimony given today by Federal Reserve
Chairman Ben Bernanke as he discusses the direction of the US economy and monetary policy
with Congress. Market expectations are for an increase in US interest rates.
Market Information from CBM Economic & Forecasting Department

Rates:
The following announcements will be made during the trading session. Overconfidence
Trading commences
and overreaction
Consumer price index Expected annual inflation rate ¼ 3 percent
Unemployment figures Expected unemployment ¼ 5 percent
Balance of payments Improvement to deficit of o$1 Bn expected
Trading re-commences 133
Retail sales released Sales expected to be up 5 percent
Fed reserve testimony to congress Chairman Ben Bernanke to testify to Congress on
US economy/monetary policy
Book squaring time
Trading ceases
Corresponding author
Professor Robert Durand can be contacted at: Robert.Durand@curtin.edu.au
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Overconfidence, Overreaction and Personality

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Overconfidence, overreaction and personality

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overconfidence (Chui et al., 2010); the absence of an attempt to compare competing

We extend DNS and DNPS in showing that personality is related to overconfidence

biological gender is an important feature of financial decision making. While we would

Rate Movement Tuesday, August 17, 2010

Market Average Bid Market Average Ask

The findings reported in Table IV confirm that there is a relationship between

Bid-ask spread Number of transactions Transactions 4$10 m

Bid-ask spread 0.15 0.17

Constant 0.000547 146.017900 10.982910

Agreeableness 0.000014 1.167496

overconfidence has a negative relationship to overconfidence in our analysis of the

Overreaction and underreaction

Where the benchmark Where the benchmark

Mean 0.40 0.34 0.26 0.29 0.22 0.21

118 Constant 0.438411 1.172440 0.439405 0.095991 0.668757

Openness to experience 0.012223

variable. Overreaction increases as an investor becomes more agreeable. Individuals

A meta-analytical basis for a theory of personality and finance

Norman’s Big 5 Bem Jackson

Durand et al. (2013)

psychological gender before we feel comfortable about theorizing in this area.

Vol. 11 No. 3, pp. 489-519.

relationship”, Journal of Business Ethics, Vol. 37 No. 1, pp. 51-63.

Appendix. Economic scenarios used in the foreign exchange trading exercises

G-8 meeting reconvenes for last session

Economic scenario 2 (Wednesday, August 18, 2010)

Market information from CBM economic & forecasting department

. AUD exchange rate: Close: TBA High: TBA Low: TBA

Economic scenario 4 (Wednesday, August 25, 2010)

Market information from CBM economic & forecasting department

Press release Australian PM is to address the Press Club on

Economic scenario 5 (Tuesday, August 31, 2010)

Market information from CBM economic & forecasting department

. AUD exchange rate: Close: TBA High: TBA Low: TBA

Economic scenario 6 (Wednesday, September 1, 2010)

Market Information from CBM Economic & Forecasting Department

To purchase reprints of this article please e-mail: reprints@emeraldinsight.com

1. TauniMuhammad Zubair, Muhammad Zubair Tauni, RaoZia-ur-Rehman, Zia-ur-Rehman Rao,

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