Relationship between Framing Bias and Big Five Personality Traits of Individual Investors

Abstract

Returns depend upon decisions of investors, but investors biases challenge the ability to take rational decisions. Study of biases and their relationships with personality traits helps to understand how biases originate, the way in which they possibly effect investors, and which personality types could be more susceptible to them. There are evidences that biases have relationships with personality traits of investors and this study focuses on one such relationship between framing bias and personality traits. Given the qualitative nature of variables under study, the relationship was established by statistically significant coefficients of logistic regression equation, where bias-variable was dependent and big five personality traits were independent. The score of personality trait, which had significant relationship, was cross tabulated with bias variable, the chi square test indicated a statistically significant relationship. The results lead to conclusion that an investor with higher score of agreeableness has higher probability of having framing bias. It is also discussed that an agreeable person may demonstrate irrationality discussed in prospect theory, more as compared to others, as the framing effects were measured using gain and loss frames. Since the study deals with frames of communication, it indicates towards the effects of personality traits on communication between portfolio manager and clients. The study contributes for portfolio managers that an agreeable client may not actually agree for rational decision if the communication is not in right frame.