Extroverted? You may have better financial outcomes

For the last thirty years I have made most of my money through investing, which I find great fun. Mostly this has been on the stock markets in the UK, Australia, and the US. In a sense it has been a very successful hobby. For that reason, this new study caught my attention.

Most researchers would say that the way you approach money is based on risk tolerance, financial advice or past experiences, but this new research shows that your personality may have a big impact on financial decision making and risk taking.

In a new study, the researchers investigated the “Big Five” personality traits: openness, conscientiousness, extroversion, agreeableness and neuroticism (OCEAN). They identified three distinct combinations of traits with financial outcomes, specifying Resilient, Over Controlled and Under Controlled personality profiles that are associated with risk-taking and money management behaviors.

What the researchers say: “Based on our results, the people with the best financial outcomes tend to be those who are well-adjusted, more extroverted and less neurotic,” said the lead researcher. “They’re also willing to take some risks, but they don’t take too many.

“The industry requires us to measure this thing called risk, but I was talking to people and understood that there's more to somebody's financial life than just their risk tolerance,” he added.

For the study, published in Personality and Individual Differences, the team surveyed 395 participants about personality, financial risk tolerance, net worth and happiness.

“Using advanced statistical modeling, we identified three overarching types of people based on combinations of their OCEAN scores,” the researchers said. “We then explored how members of those three groups differed in financial perspectives and experiences.”

The largest profile was the Over Controlled group, who exhibited high agreeableness and conscientiousness, but low extroversion. These people don’t like risk, so they avoid activities that are risky but could grow their wealth, like investing in the stock market.

The other two profiles are more tolerant of risk. The next largest, the Resilient group, are generally well-adjusted and stable people; they are extroverted, open and agreeable, and not very neurotic. These profiles were associated with more successful financial outcomes, because while they don’t avoid risks, they also don’t take too many.

Members of the Under Controlled group are less conscientious, and more extroverted and neurotic. They tend to enjoy taking risks, but they sometimes take too many, negatively affecting their net worth.

The team’s research shines light on an understudied topic. While money has a significant impact on better-researched subjects like marriage and parenting, it’s still relatively uncommon to explore the psychology behind the finances themselves.

“It's really interdisciplinary work,” one of the co-authors commented. “It's taking very basic models of personality, together with sophisticated statistics on psychometric approaches, and then applying them to very basic questions about investing and finance.”

With such strong associations between the profiles and financial outcomes, the researchers hope their findings will allow financial planners to better serve their clients, so they can help people make the best financial decisions for them.

“Planners, if they want to help people, need to measure OCEAN,” the researchers concluded. “If people can easily talk about themselves—and that itself tells you a lot about how they handle money—then practitioners simply need to measure it and record it.”

So, what? What the researchers seem to be saying is that financial advisors need to develop good listening skills. By the words that they use, people tell you about themselves, about their hopes and fears and their assumptions about themselves and the market.

A good listener knows how to ask challenging questions to help their clients to examine themselves and their assumptions. Having these skills would make advisors really helpful allies, not just product salespeople or fee collectors.

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