The Impact of Personality, Salience, And Love of Money On Investment Decisions

Abstract

This dissertation investigates the impact of Personality, Salience, and Love of Money (LoM) on an investor’s short-term investment decision (ST-D) and long-term investment decisions (LT-D). The research of this dissertation falls under the discipline of behavioral finance and uses Prospect Theory as a theoretical lens. A succession of three papers (models) was written on this theme. The first paper has explored the impact of five types of personality traits on ST-D and LT-D. Moreover, risk perception has been tested as a mediator between each personality type and investment decisions. The second paper tested the effect of salience on ST-D and LT-D, and it was also tested if the impact of salience on ST-D and LT-D differed between individual investors and professional investors. Moreover, it was also investigated whether the impact of salience on ST-D and LT-D differed between female investors and male investors. The third paper focused on the effect of LoM on ST-D and LT-D and whether current income and future inheritance moderated the relationship between LoM and both ST-D and LT-D. The data were collected by 277 individual and professional equity investors investing in Pakistan Stock Exchange (PSX). The findings of the first paper were that individuals only with neuroticism and extrovert personalities showed a significant relationship with ST-D. iv However, investors with openness, conscientiousness, and extraversion personality traits showed an effect on LT-D. Risk perception was found to mediate the relationship of extraversion, openness, agreeableness, and conscientiousness personality traits and LT-D only. The results of the second paper found that salience has a significant positive impact on both ST-D and LT-D. Moreover, individual investors and professional investors were found significantly different from each other. Furthermore, the parametric tests of difference between the two groups also showed that path coefficients of female investors were significantly different from the path coefficient of male investors both for ST-D and LT-D. The third paper found that LoM showed a significant positive impact on both short-term and long-term investment decisions. Furthermore, income moderated the relationship between LoM and ST-D and did not moderate the relationship of LoM with LT-D. The expectation of receiving future inheritance moderated the relationship between LoM and both ST-D and LT-D. The findings of this research have implications for psychologists, economists and finance executives. The findings will facilitate money managers to cultivate a deeper understanding of their clients’ behavior for ST-D and LT-D. Thus, it is important that financial advisors include this behavioral aspect in their risk models to improve the investment plans and decisions for their clients. The study has contributed to the growing body of applied behavioral research in the discipline of finance, especially to the literature on personality, risk perception, salience, and LoM used by investors while making investment decisions. Keywords: personality type, risk perception, salience, love of money, short-term investment decision, long- term investment decision.