The Big 5 personality traits and investment biases: the role of financial literacy

Purpose This paper investigates the associations among the Big 5 personality traits (neuroticism, conscientiousness, agreeableness, openness to experience and extroversion), nine prominent investment biases and the moderating role of financial literacy. Design/methodology/approach We used survey data from 475 individual investors in India based on various benchmarked scales in the literature and structural equation modeling to evaluate the desired relationship between the constructs. Findings Our evidence shows that the extroversion personality trait is the most vulnerable to behavioral biases, and overconfidence bias affects individual Indian investors the most. Financial literacy is positively associated with two biases (risk aversion and representativeness bias) and moderates the relationship between two personality traits (extroversion and agreeableness) and risk aversion. Research limitations/implications Our study has limitations. First, it does not examine financial literacy in detail. Therefore, researchers should examine financial literacy within larger frameworks than those used in our study. Second, we confined our analysis to the Big 5 personality traits and nine behavioral biases. Our selection of biases to include in the study involved some subjectivity. Third, we limited our analysis to Indian investors. Researchers should replicate our study to see if its findings are generalizable in other countries with differing characteristics. Our findings call for a more careful examination of the circumstances behind which personality traits manifest in specific bias. Practical implications Investment advisors can help their clients make rational investment decisions by guiding them to deal with their investment biases. Social implications Improving financial literacy could help investors avoid the pitfalls of behavioral biases and increase their performance in the stock market. Originality/value This study is the first to provide a comprehensive framework that examines the relationship between personality traits and investor biases and the moderating role of financially literate investors.