The impact of personality traits on households'financial behavior

Abstract

Using a large sample that can represent the Dutch population, this thesis aims to study the effect of personality traits on households’ financial preferences, financial behavior, and financial literacy. There are three main studies in the thesis. The first study mainly investigates the relationship between the big five personality traits and financial risk tolerance and financial behavior. The results show that all the big five personality traits are significantly related to financial risk tolerance. Furthermore, these personality traits indirectly affect the ownership of bonds, mutual funds, and equity among thehouseholds.

The second study examines the relationship between the locus of control (LOC) personality traits and households’ financial behavior. The results shows that the two dimensions of LOC have significant effect on personal savings and debt, and indirect effect on insurance ownership. This study also finds that the LOC traits have prediction power in addition to the big five model, since LOC has a significant effect on financial risk tolerance and financial behavior amidst the presence of the big five and other control variables.

The last study focuses on the impact of personality traits on households’financial literacy. Intellect from the big five model and internal LOC from locus of control are consistently significant predictors of financial literacy measures. Additionally, those who score relatively high on the personality traits of intellect and internal LOC tend to hold more diversified portfolios of financial assets including bonds, mutual funds, and stocks, since they tend to have higher levels of financial literacy.