Syntax Literate:
Jurnal Ilmiah Indonesia p–ISSN: 2541-0849 e-ISSN: 2548-1398
Vol. 8, No.
12, December 2023
THE RELATIONSHIP OF BIG 5 PERSONALITY TRAITS ON INVESTMENT DECISION
Dwi Novira Rahmah, Maria Ulpah
Universitas Indonesia, Indonesia
Email: [email protected], [email protected]
Abstract
The Big
Five personality traits, comprising openness to experience, conscientiousness,
extraversion, agreeableness, and neuroticism, represent a widely acknowledged
framework in the realm of psychological research. These characteristics have
shown to be especially important in studies on financial decision-making,
especially when it comes to individual investing behavior. Within the framework
of this research, which utilizes data from the Indonesian Family Life Survey
(IFLS 5), a thorough examination is carried out to reveal the intricate
influence of the Big Five personality traits on the investment behavior of
households. This study uses probit regression techniques with STATA. The
results of the probit regression show that openness to experience has a
positive and significant effect while neuroticism has a negative and
significant effect on household investment decisions.
Keywords: Investment Decision, Behavioral
Finance, Big 5 Personality
Introduction
The history of investment behavior is closely
linked to the complex and ever-changing process of making financial decisions.
People's decisions are impacted by a multitude of elements when they navigate
the complex world of investing, from sociodemographic traits and personal
traits to market dynamics and economic conditions. Understanding why people
decide to deploy their financial resources in particular ways by looking at the
underlying psychological, social, and economic factors that influence these
choices is the goal of the study of investment behavior. The goal of investors
is usually to maximize returns, but this is not without risk and uncertainty,
which is why studying investing behavior is an essential part of financial
research.
Figure 1. IHSG Movement 2021 - 2022
Source: Indonesia Stock Exchange
In 2022, Indonesia's capital market experienced
substantial expansion, witnessing a 33.5% surge in the number of investors
compared to the prior year. This notable growth is ascribed to the increased
influx of foreign direct investment (FDI) into the market. On December 28,
2022, the IHSG level soared to 6,850.52, marking a significant increase from
the previous year when it reached 7,318.016 on September 13, 2022. Various
factors, including information, political events, news, rumors, and individual
personalities, are identified as contributors to this upward trend. The
decision-making process for investors involves considerations influenced by
behavioral finance theory.
Behavioral
Finance Theory is a branch of financial research that studies how psychological
factors and human behavior affect financial decision-making. The theory assumes
that people do not always act rationally in economic situations, but are
influenced by prejudices, emotions, and social factors. Behavioral finance
explains that there is a combination of affective and cognitive dimensions in
human decision-making
Empirical studies have shown that factors such
as personality, emotional, and social traits are more significant than stock
prices and economic conditions
Psychological conditions play a crucial role in
understanding individual investment behavior and decision-making risk.
Individual traits, such as personality traits like Openness, Conscientiousness,
Extraversion, Agreeableness, and Neuroticism, influence how investors allocate
their resources. The Big Five Personality Traits, also known as OCEAN, is a
theoretical framework used in psychology to understand human personality
dimensions. This model has been used in various fields, including psychology,
sociology, and organization, to comprehensively understand human personality
traits.
According to research
Sociodemographic factors, among which education
stands out prominently, play a pivotal role in shaping an individual's
investment behavior. When it comes to investing, education has a crucial role
in determining an individual's cognitive processes and ability to make
decisions. Higher education levels are frequently associated with greater
financial literacy, endowing people with a more profound comprehension of
investment tools, risk mitigation techniques, and market dynamics.
A higher level of education not only improves
one's understanding of financial topics but also gives one more self-assurance
and expertise when negotiating the intricacies of the investing world. More
educated people might be better at carrying out in-depth research, assessing
investment options critically, and making decisions that are in line with their
financial objectives. This is consistent with the study
When making investment decisions, investors must
address a variety of considerations, each of which plays an important role in
shaping the outcome of their financial decisions. Among these considerations,
individual personality and various sociodemographic factors stand out as
important determinants. The focus of this research project is on understanding
the complex interactions between these factors and investment behavior. The
overall goal of this research is to uncover and analyze the myriad of factors
that can influence an individual's investment behavior and decision-making
process.
To achieve this goal, this study relies on
secondary data utilizing the results of the Indonesian Family Life Survey
(IFLS). By examining the rich information provided by this dataset, this study
uncovers patterns, correlations, and nuanced insights that reveal the complex
relationships between individual characteristics, sociodemographic factors, and
investment decisions. Through this research, we aim to provide valuable
insights into a broader understanding of the factors that influence investment
decisions, with potential implications for both individual investors and the
financial landscape as a whole.
From this theory, it can be hypothesized that:
H1: Openness to Experience has a positive and
significant effect on Investment Decision
Individuals with high levels of openness to
experience are more likely to engage with new ideas and information that can
have a significant impact on their investment decisions. Individuals with
openness to experience tend to conduct thorough research and analysis before
making investment decisions. Whereas individuals with low openness to
experience tend to be conservative and narrow-minded. An openness to experience
score may indicate a greater willingness to experiment and try new things,
which may encourage individuals to take risks
H2: Conscientiousness has a negative and
significant effect on Investment Decisions.
Individuals who have high levels of
conscientiousness tend to be more conservative investors. They tend to prefer
to invest in stable and safe financial instruments such as bonds or low-risk
mutual funds. This is reinforced by research
H3: Extraversion has a positive and significant
effect on Investment Decision
Individuals who have a high level of
extraversion tend to have high confidence in taking risks and facing
challenges. They may be more likely to make bold investment decisions and are
willing to take greater risks in search of higher returns.
H4: Agreeableness has a positive and significant
effect on Investment Decision
Individuals with high agreeableness prefer to
invest in stable and safe instruments. They tend to be influenced by the
opinions and advice of others. This may affect their investment behavior if
they tend to follow instructions or recommendations from others without
in-depth analysis or independent evaluation.
According to
H5: Neuroticism has a negative and significant
effect on Investment Decision
People with high levels of neuroticism tend to
be more insecure and prone to anxiety and worry. This may cause them to be risk-averse
when investing. They may prefer to avoid investments that are considered risky
in favor of safer investments. The relationship between neuroticism and
investment decisions from some literature has different results. Neuroticism is
associated with factors such as planning and self-control, which means that
emotionally stable people are more likely to avoid impulsive and excessive
purchases.
Research Method
This study examines the influence of Big Five Personality based on (Openness, Conscientiousness, Extraversion, Agreeableness, and Neuroticism) on Investment Decisions with Sociodemographic factors as control variables. This research model is formed with the modified results of previous studies that have related topics on the relationship between variables.
Investment Decision
|
Independent Variables |
|
The Big 5 Personality - Extraversion |
|
Control
Variables |
|
Education |
|
Gender |
|
Income |
|
Household
Size |
|
Residence
Location |
Figure
2. Research
Framework
Source: The Author
The research employs the Household Investment
Decision as the dependent variable, represented by a binary variable that
signifies an individual's choice to either engage in investment or abstain from
it. The independent variables encompass the Big 5 Personality traits, namely
Openness, Conscientiousness, Extraversion, Agreeableness, and Neuroticism.
Additionally, sociodemographic factors like Education, Gender, Income,
Household Size, and Residence Location are integrated as control variables in
the study.
Table 1 Operational Variables
|
Variable |
Explanation |
Book & Variabel |
Questionnaire |
|
Investment
Decision |
Dummy
Variable (=1 if choose
to Invest) |
HH, Book 2
(HR01G) |
Do you or any
other household member have stocks? |
|
Openness to
Experience, |
1=Strongly
Disagree, 2 = Disagree, 3 = Neutral, 4 = Agree, 5 = Strongly Agree |
HH, Book 3B,
(Personality Section) |
-I see myself
as someone who appreciates the values of art and aesthetics. -I see myself
as someone who can think independently without relying on old ideas. -I see myself
as someone who has a dynamic imagination. |
|
Conscientiousness |
1=Strongly
Disagree, 2 = Disagree, 3 = Neutral, 4 = Agree, 5 = Strongly Agree |
HH, Book 3B,
(Personality Section) |
-I see myself
as someone who completes tasks thoroughly. -I see myself
as someone who tends to be lazy. -I see myself
as someone who does things efficiently. |
|
Extraversion |
1=Strongly
Disagree, 2 = Disagree, 3 = Neutral, 4 = Agree, 5 = Strongly Agree |
HH, Book 3B,
(Personality Section) |
-I see myself
as someone who talks a lot. -I see myself
as someone quiet. -I see myself
as someone friendly and sociable. |
|
Agreeableness |
1=Strongly
Disagree, 2 = Disagree, 3 = Neutral, 4 = Agree, 5 = Strongly Agree |
HH, Book 3B,
(Personality Section) |
-I see myself
as someone who is understanding and kind towards others. -I see myself
as someone who is sometimes rude to others. -I see myself
as someone forgiving. |
|
Neuroticisms |
1=Strongly
Disagree, 2 = Disagree, 3 = Neutral, 4 = Agree, 5 = Strongly Agree |
HH, Book 3B,
(Personality Section) |
-I see myself
as someone relaxed and able to handle stress well. -I see myself
as someone who is easily nervous. -I see myself
as someone who worries a lot. |
|
Education |
Years
of Schooling |
HH,
Book 3A (DL06 & DL07) |
What
is the highest level of education that you have attended or are currently
attending? & What
is the highest level/class that you have completed at this school? |
|
Gender |
1:
Male, 0: Female |
HH
Book 3A (COV
5) |
What
is your gender? |
|
Income |
1=lowest income group 2=middle-low
income group 3=middle
income group 4=middle-high
income group 5=high
income group |
PCE |
|
|
Household Size |
Total number of family members |
HH
Book K |
|
|
Residence Location |
1: Live in Urban, 0: Live in Rural |
HH
Book K (SC05) |
Region:
(Urban/Rural) |
Source: Author (2023)
The data used by researchers is secondary data.
The secondary data for this study were obtained from the fifth wave of the
Indonesia Family Life Survey. IFLS is a survey of household and community
conditions in Indonesia that is multi-topic and large-scale. It is multi-topic
because it covers a wide range of topics such as household expenditure, smoking
habits, employment, and so on. The survey is large-scale as the sample
represents 83% of the Indonesian population and was continued in 1997, 2000,
2007, 2014, and so on. This survey was conducted by the RAND Corporation with
Survey Meter. The type of data for this research is cross-section data.
Cross-sectional data according to (Sugiyono, 2018) is data collected from the
same or different objects and instruments in unequal time intervals.
Probit Regression is utilized as the analytical
method in this investigation. The application of the probit model is suitable
when the dataset conforms to a normal distribution. As delineated by
This study also shows The T-test, F-test, and R2.
The Wald test or z-stat, commonly called the t statistic in OLS regression,
aims to determine the effect of the independent variable on the dependent
variable and whether it has a significant effect or not. This test will show
the influence of The Big 5 Personality variables (Openness, Conscientiousness,
Extraversion, Agreeableness, and Neuroticism) on Investment Decisions. The
Likelihood Ratio (LR) test, commonly called the F test in OLS regression, is a
test used to see the effect of the independent variable on the dependent
variable simultaneously. The McFadden test or pseudo r-squared, also known as
the coefficient of determination, can display the ability of variations in the
independent variables to explain variations in the dependent variable.
Descriptive Analysis
Table 2 Descriptive Statistical Analysis Results
|
Variable |
Observation |
Mean |
Stdev |
Min |
Max |
|
Investment
Behavior |
12626 |
0,300 |
0,458 |
0 |
1 |
|
*Openness
to Experience |
12626 |
0,021 |
1,504 |
-4,44 |
2,56 |
|
*Conscientiousness |
12626 |
0,008 |
1,460 |
-7,49 |
3,74 |
|
*Extraversion |
12626 |
-0,069 |
1,483 |
-7,44 |
2,87 |
|
*Agreeableness |
12626 |
-0,039 |
1,530 |
-8,76 |
4,09 |
|
*Neuroticism |
12626 |
-0,145 |
1,481 |
-6,09 |
3,85 |
|
Education
(Years of Schooling) |
12626 |
9 |
5 |
0 |
16 |
|
Gender |
12626 |
1,367 |
0,774 |
0 |
1 |
|
Income |
12626 |
0,196 |
3,97 |
1 |
5 |
|
Household
Size |
12626 |
4 |
2 |
1 |
16 |
|
Residence
Location |
12626 |
0,594 |
0,491 |
0 |
1 |
Source: The Author
From the descriptive statistical analysis results
above, the data to be observed are 12626 respondents. From the table it can be
concluded that the average respondent is 43 years old, with an average
education of 9 years, which means graduating from junior high school with an
average number of family members in 1 household is 4 people.
Probit Regression Analysis
Table 3 Probit Regression Results
|
Investment Decision |
Investment Decision (with control) |
|
|
Openness
to experience |
0,047*** (0,015) |
-0,0006 (0,017) |
|
Conscientiousness |
0,020 (0,017) |
0,005 (0,018) |
|
Extraversion |
0,008 (0,017) |
-0,004 (0,186) |
|
Agreeableness |
0,010 (0,017) |
-0,002 (0,184) |
|
Neuroticism |
-0,040*** (0,015) |
-0,011 (0,017) |
|
Education |
|
0,061*** (0,006) |
|
Gender |
|
-0,163** (0,087) |
|
Income |
|
0,102*** (0,019) |
|
Household
Size |
|
0,029** (0,016) |
|
Residence
Location |
|
0,113*** (0,051) |
Source: The Author.
The probit regression results in the Table above
reveal significant findings concerning the relationship between Big 5
Personality variables and investment decisions. Among the five personality
traits examined, Openness to Experience and Neuroticism stand out as having
noteworthy impacts. Specifically, the Openness to Experience variable
demonstrates a positive and statistically significant relationship with
investment decisions. This aligns with the study's hypothesis, which posited that
Openness to Experience would exhibit a positive correlation with investment
decisions.
This finding is consistent with research
conducted by
The study reveals that various factors,
including gender, education, income, land ownership, house ownership, household
size, and residence location, significantly influence investment decisions.
Gender male is negatively correlated with investment decisions, while education
is positively correlated with investment decisions. Income is positively
correlated with investment decisions, and assets like land and houses are
positively correlated. Household size also increases investment probability,
and urban areas are more likely to invest due to better education and access to
qualified facilities. Overall, these factors play a crucial role in shaping
investment decisions.
T Test, F Test, and R2
The study found that Openness to Experience, Neuroticism, Education, Gender,
Income, Household Size, and Residence Location have significant influences
on investment decisions because the p-value of those variables is below 5%. These
results reject the hypothesis that Openness to Experience, Neuroticism,
Education, Gender, Income, Household Size, and Residence Location have a significant
influence on investment decisions.
The result of p-value or prob>
chi2 is 0.000 where the result is smaller than alpha (5%), so H0 is rejected.
So the variables Openness to Experience, Conscientiousness, Extraversion,
Agreeableness, Neuroticism, Education, Gender, Income, Household Size, and Residence
Location have a significant relationship simultaneously to Investment Decisions.
The coefficient of determination reaches 0.0611 or 6.11%. So the variation of
the variables Openness to Experience, Conscientiousness, Extraversion,
Agreeableness, Neuroticism, Education, Gender, Income, Household Size, and Residence
Location can explain the variation of the investment decision variable by 6.11%
and the rest is explained by other variables outside the model.
Conclusion
From The Big 5 Personality traits, Openness to Experience and
Neuroticism affect investment decisions. Openness to experience has a positive
relationship with investment decisions. This is by research from (Almås et al.,
2020) which states that people with high Openness to experience tend to choose
to invest. In addition, the Neuroticism variable has a negative and significant
effect on investment decisions. This supports research by (Cude et al., 2020)
which states that there is a negative relationship between neuroticism and
investment decisions. Meanwhile, the variables Conscientiousness, Agreeableness,
and Extraversion do not influence Investment Decisions.
Nevertheless, this study has several inherent limitations that can be addressed by further research. Although in this study it was concluded that the variables of Conscientiousness, Agreeableness, and Extraversion did not have a significant influence on investment decisions, further research can be done to understand the role and relationship of these three personality variables with investment decisions in more depth. There may be specific factors that can influence this result. In addition, some external factors, such as global economic conditions or geopolitical events, may have an influence on investment decisions but were not included in this study. Further studies could consider these external variables to get a more complete picture.
This study may have limitations in capturing changes in investment attitudes and behaviors over time. Longitudinal analysis or long-term research can provide better insight into how these factors evolve. Longitudinal studies would allow researchers to track the development of individuals or groups in their investment decisions over time. This will open up opportunities to identify trends, changes in attitudes, and responses to certain events that might influence investment choices. For example, how increased risk in global financial markets may modify investor behavior or how changes in domestic economic conditions may affect risk preferences and investment decisions.
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Copyright holder: Dwi
Novira Rahmah, Maria Ulpah (2022) |
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First publication right: Syntax Literate: Jurnal Ilmiah Indonesia |
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