{"id":34696,"date":"2019-06-03T13:48:56","date_gmt":"2019-06-03T11:48:56","guid":{"rendered":"https:\/\/www.getsmarter.com\/blog\/?p=34696"},"modified":"2025-10-07T13:04:34","modified_gmt":"2025-10-07T11:04:34","slug":"personality-in-financial-decisions-and-financial-crises","status":"publish","type":"post","link":"https:\/\/www.getsmarter.com\/blog\/personality-in-financial-decisions-and-financial-crises\/","title":{"rendered":"Personality in Financial Decisions and Financial Crises"},"content":{"rendered":"\n

The American Psychological Association defines personality as \u201cindividual differences in characteristic patterns of thinking, feeling and behaving\u201d.1<\/sup> The concept of personality is usually associated with the field of psychology. However, this is not the only area in which the study of personality is applicable. Understanding personality and biases can help us examine how and why people make decisions. This doesn\u2019t simply mean everyday decisions like what to watch on TV \u2013 it extends to the world of business, where personality can play a hidden role in how financial decisions are made.<\/p>\n\n\n\n

Understanding bias<\/h3>\n\n\n\n

There are a host of potential biases that can influence decision-making…<\/p><\/blockquote><\/figure>\n\n\n\n

One of the key ways that our decision-making is affected is through bias. Bias is defined by the Cambridge English Dictionary as \u201cthe action of supporting or opposing a particular person or thing in an unfair way, because of allowing personal opinions to influence your judgment\u201d.2<\/sup><\/p>\n\n\n\n

The origins of bias, despite the dictionary definition, are not necessarily negative. Biases are our brain\u2019s way of simplifying complex problems, essentially allowing us to make decisions more quickly, and avoid decision paralysis when confronted by large problems. This has made them an effective survival tactic throughout history.3<\/sup> Unfortunately, these biases can quickly become problematic in a financial setting, as they can cause us to overlook pertinent data.<\/p>\n\n\n

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This list is far from exhaustive, but it does show that financial decision-making is often more affected by our own personal beliefs than we may realise.<\/p>\n\n\n\n

Personality and financial decision-making<\/h3>\n\n\n\n

In their discussion of the 2008 financial crisis, the authors of the paper \u2018Psychology, financial decision making, and financial crisis\u2019 highlight the apparently irrational behaviour of market actors \u2013 both investors and institutions in operation at the time \u2013 whose actions ultimately brought the financial market to its knees.5<\/sup> However, these actions may not be quite as irrational as they appear. Instead, they can be seen as the result of specific and regular behaviours. In other words, functions of the actors’ personalities.6<\/sup><\/p>\n\n\n\n

There are various ways to describe underlying personality traits. One method is often referred to as the \u2018Big Five\u2019 model, which describes the five essential building blocks that make up our personality:7<\/sup><\/p>\n\n\n

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Of the \u2018Big Five\u2019, the trait most closely associated with financial decision-making is conscientiousness. This trait governs thoughtfulness, impulse control, and goal-directed behaviours, and was directly linked to the ability to preserve wealth during the 2008 financial crisis.8<\/sup><\/p>\n\n\n\n

Conscientiousness as a personality trait in financial decision-making is tied to impulsivity: the less conscientious you are, the more likely you are to undertake impulsive, or risky behaviour.9<\/sup> Those who rank highly in conscientiousness, by contrast, are more likely to plan carefully before making a decision, and are therefore less risk-prone.<\/p>\n\n\n

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These behavioural traits were on full display during the lead-up to the 2008 financial crisis, in both consumers and bankers. Subprime mortgage lending grew quickly, attractive to consumers who saw the chance to own their homes, and to bankers for their high return. Bankers even found a way to profit twice by repackaging the loans to other investors.10<\/sup> The financial downfall came swiftly: raised interest rates, combined with a lower housing market, meant that many borrowers were unable to continue paying back their loans, and the knock-on effect on banking institutions eventually led to a full global recession.11<\/sup><\/p>\n\n\n\n

While this is a simplification of the many complex factors that fed the 2008 financial crisis, it\u2019s illustrative of the role that risk-taking behaviour can play when allowed to run unchecked. It also shows the power our personalities have in the decisions we make: a single aspect of our personality can have a disproportionate effect on the decisions we make, even in supposedly logical pursuits.<\/p>\n\n\n\n

This begs the question: how can you improve your financial decision-making if it\u2019s partly out of your hands? The answer is that you can learn to change.<\/p>\n\n\n\n

Personal growth for better decision-making<\/h3>\n\n\n\n

Conscientiousness as a personality trait in financial decision-making is tied to impulsivity\u2026<\/p><\/blockquote><\/figure>\n\n\n\n

It\u2019s easy to fall into the trap of thinking that your personality is ultimately immutable, but the truth is that, if you truly want to, you can change and improve each of the Big Five personality traits. There are several ways to go about improving your conscientiousness. According to research presented in the Harvard Business Review<\/em>, you can increase your engagement in activities based on specific criteria, by performing actions that:12<\/sup><\/p>\n\n\n\n