Impact of personality on risk tolerance

Personality affects all the aspects of the life. Somebody choose to be managers, others choose to be teachers and yet others choose to be entrepreneurs. Personality also affects the choices of financial sources. Some are inclined by personality to be risk tolerant and others are not. Some find it easy to save while others find it difficult.

Risk tolerance is one aspect of the personality. So the personality has trust, natural tendencies for optimization, regret, attributing success to luck or skill and overconfidence. Personality combines nature with nurture. High risk tolerance people tend to be overconfident, with high levels of trust and high propensities for maximization. Generally compared to women, men are more risk tolerant than women and the relatively young are more risk tolerant than the relatively old.

In summary, we can quote the following authors’ views on the impact of personality on financial risk-tolerance:

  1. A person’s attitude toward risk is as individual as his or her personality type. Some people avoid risk at all costs, others embrace risk by investing all their money in options, stocks and junk bonds (Hammond, Keeney and Raiffa, 1999, p. 135). The researchers here, while trying to link personality to risk-tolerance assert that personality is a highly subjective trait. It is this personality type (Risk Averse/ Risk Taker) that determines the individual’s likeliness to take financial risks.
  2. Investment is more about personality type than spending and making money. Risk tolerance is all about personality type (Bateman, 2001; p. 26). Here, the author is trying to say that ‘investment’ as a concept is primarily based on personality. If it is a part of a man’s personality, he chooses to invest; and if it is not, then investment is absent.
  3. An individual’s personal risk tolerance is based on innate personality, experience with the particular project type and perception of importance of the project (LaBrosse, 2006; p. 45). LaBrosse relates several factors to risk tolerance: personality, experience and the nature and importance of the investment instrument.
  4. Risk tolerance is a personality trait, and people differ in their willingness to assume risk (Robbins, 2004; p. 166). Robbins’ definition is closely related to Bateman’s, and is the most widely accepted
  5. Risk tolerance is personality-specific and therefore a highly individual attribute (McBreen and Walper, 2008). The authors here state that risk tolerance is a highly subjective trait and varies with each individual’s personality.
  6. Risk tolerance is closely related to two personality traits: personal control (people’s sense that they can affect both their environment and life decisions) and achievement motivation (the degree to which people are goal-oriented) (Hagstrom, 2002; p.211).
  7. Risk-Tolerance is simply the assessment of a man’s financial personality (Mosier, 2008, p. 22). Mosier uses the term ‘financial personality’ unlike other researchers in order to explain risk tolerance better.
  8. Each person’s level of risk tolerance is a complex balance of personality (Furlong, 2010).
  9. Individual risk tolerance is simply a matter of his/ her personality, among other factors like preference, taste and experience (Dees, Emerson and Economy, 2001; p.131)
  10. Your tolerance for risk is driven by your personality and investment horizon (Belknap, Marty and Byrom, 2007, p.155)

References

  • Hammond, J.; Keeney, R.; Raïffa, H. (1999). Smart choices: a practical guide to making better decisions. Harvard business Press, USA
  • Bateman, K. (2001). The Young Investor: Projects and Activities for Making Your Money Grow. Chicago Review Press, USA
  • LaBrosse, M. (2006). Cheetah Project Management: The Fastest Way to Reach Your Goals. MACLAF Press, NV
  • Robbins, S. (2004). Decide & conquer: make winning decisions and take control of your life. Prentice-Hall, New jersey
  • McBreen, C.; Walper, G. (2007). Get rich, stay rich, pass it on: the wealth-accumulation secrets of America’s Richest families. Penguin Group, USA
  • Hagstrom, R. (2001). The essential Buffett: timeless principles for the new economy. John Wiley & Sons, USA
  • Mosier, D. (2010). Financial Straight Talk: Road to Retirement. Authorhouse, USA
  • Furlong, G. (2010). The Conflict Resolution Toolbox: Models and Maps for Analyzing, Diagnosing and Resolving Conflict. John Wiley and Sons, USA
  • Dees, G.; Emerson, J.; Economy, P. (2001). Enterprising nonprofits: a toolkit for social entrepreneurs. John Wiley & Sons, USA
  • Belknap, M.; Marty, M.; Byrom, J. (2007). Armed Forces Guide to Personal Financial Planning. Stackpole Books, USA

 

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