Adam Szyszka

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Primary submission: 16.01.2015 | Final acceptance: 30.07.2015

Investors’ Expertise, Personality Traits


and Susceptibility to Behavioral Biases in
the Decision Making Process
Marcin Rzeszutek1, Adam Szyszka2, Monika Czerwonka3

ABSTRACT The aim of this paper is to investigate the degree of susceptibility to behavioral biases (the certainty
effect, the sunk cost fallacy, and mental accounting) among people of various levels of expertise in
market investments and to determine whether this susceptibility is correlated with certain personal-
ity traits (impulsivity, venturesomeness, and empathy). The study included 200 participants: 100 retail
investors who regularly invest in the Warsaw Stock Exchange and 100 students of the Warsaw School
of Economics who are casually involved in investing. In this study, employing a survey methodology,
we conducted a laboratory experiment that allowed us to isolate behavioral biases and personality
traits and measure their influence on investors’ decision-making processes. The participants filled out
questionnaires containing two parts: 1) three situational exercises, which assessed susceptibility to
behavioral biases, and 2) the Impulsivity, Venturesomeness, Empathy Questionnaire (IVE) Question-
naire which measures three personality traits (impulsivity, venturesomeness, and empathy). Statisti-
cal analyses demonstrated that susceptibility to behavioral biases depends on the level of expertise
in market investing such that expertise increases susceptibility to behavioral biases. Some personal-
ity traits influenced the participants’ likelihood of displaying these biases.

KEY WORDS: investors’ expertise; personality traits; behavioral biases; rationality; behavioral finance

JEL Classification: G19

1
University of Finance and Management - Faculty of Management and Finance, Warsaw, Poland; 2 Warsaw School of
Economics - Department of Capital Markets, Poland; 3 Warsaw School of Economics - Department of Finance, Poland

1 Introduction personality traits (Akerlof & Schiller, 2009; De Bondt


There is a vast literature dedicated to showing that neo- & Thaler, 1987; Kahneman 2012; Szyszka & Zielonka,
classical finance theory does not properly depict the real 2007; Todd & Gigerenzer, 2003). Abundant evidence
behavior of an investor in a stock market and that the from psychological research that suggests that humans
investment decision-making process is greatly shaped have restrained cognitive possibilities, are controlled by
by psychological factors, such as moods, emotions and emotions, and succumb to mob mentality while making
choices in risky and uncertain situations, drew financial
Correspondence concerning this article should be addressed to: behaviorists’ attention to the drawbacks of the homo
Marcin Rzeszutek, University of Finance and Management - economicus assumption and the hypothesis about the
Faculty of Management and Finance, Pawia 55, 01-030 Warsaw, market’s efficiency (Fama, 1970; 1991; Markowitz, 1952;
Poland. T: +48 22 536 54 11. E-mail: [email protected] Von Neumann & Morgenstern, 1944) and the suscepti-

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338 Vol.9 Issue 3 2015 337-352 Marcin Rzeszutek, Adam Szyszka, Monika Czerwonka

bility of investors to so-called behavioral biases resulting 1985). According to neoclassical finance theory, only
from cognitive biases and heuristics as well as emotions an analysis of current and future losses and profits
(Agnew, 2006). These biases disrupt the rationality of should influence these decisions (Bernstein, 2007).
the process of making investment decisions and con- However, investors all too often attach importance to
tribute to inefficient market reactions to information outlays made in the past toward a given investment,
and, as a result, to asset mispricing (Coval & Shumway, and these past costs significantly influence both pres-
2005; Rzeszutek & Czerwonka, 2011). Szyszka (2010) ent and future decisions (De Bondt & Makhija, 1988).
proposed the Generalized Behavioral Asset Pricing On the stock market, this overweighting of past costs
Model, which shows how asset prices can be influenced often leads to retaining positions that generate costs
by various behavioral biases and how prices may devi- for too long and sometimes even to purchasing more
ate from fundamental values due to investors’ irrational shares after declines (Friedman et al., 2007). In doing
behavior. The model distinguishes three behavioral so, investors seek to reduce the average price of pur-
variables that are linked to errors in understanding chasing a share in the hopes that they will be able to
and transforming information signals, problems with record profits more quickly after a small economic up-
representativeness and probability judgment, and un- turn (Connolly & Zeelenberg, 2002; McAfee, Mialon,
stable preferences. In this paper, we investigate three & Mialon, 2010).
examples of behavioral phenomena that are captured
by this model: the certainty effect, the sunk-cost fal- 1.3 Mental Accounting
lacy, and mental accounting. In particular, we look Mental accounting is a process of mentally coding,
at how these three important behavioral phenomena categorizing, and evaluating cash flow, i.e., record-
manifest among investors depending on their level of ing particular expenditures and revenues in various
expertise and personality traits, such as impulsivity, mental accounts (Thaler, 1999). The mental account-
venturesomeness, and empathy. ing effect undermines the principle of substitutability,
which claims that money has no label, i.e., that the
1.1 Certainty Effect source of funds is irrelevant in the spending of them
Daniel Kahneman and Amos Tversky noted many (Haigh & List, 2005). Stock market investors do not
anomalies in how individual preferences are shaped in follow this principle but rather display mental ac-
situations of uncertainty and risk (1973; 1979; 1984). counting and treat profits attained as dividends (cash)
One such anomaly is the certainty effect: the tendency differently from identical “paper” profits—those re-
to overweight outcomes that are certain compared sulting from an increased exchange rate (Winnett &
with outcomes that are highly probable. For example, Lewis, 1994). It has also been observed that investors
Kahneman (2012) observed that a substantial major- are incapable of closing losing positions and investing
ity of participants prefer a certainty of winning $850 funds from those losing shares in new endeavors be-
to a 90% probability of winning $1,000, although the cause these shares are treated as a separate mental ac-
expected value of the latter option is actually higher. count (Odean, 1998). Instead, many hope for chang-
Overweighting a certain win over a highly probable ing trends to make up for those losses in the future,
option, as in the example above, prompts people to which leads to a progressive reduction in the worth of
choose an option with a lower expected value. There- their investment portfolio.
fore, the certainty effect was shown to lead to poten-
tially less profitable investment decisions in the capital 1.4 Expertise and Rationality in Decision
market (Agnew, 2006). Making
Expertise or professional experience sometimes helps
1.2 Sunk-Cost Fallacy in making good decisions; however, equally often ex-
Making decisions in conditions of risk and uncertain- perts, aware of their knowledge within a given domain,
ty is also dependent on the sunk cost fallacy, which can fall prey to various behavioral biases, sometimes
describes the influence of costs incurred in the past even more so than naïve individuals (Braun & Yaniv,
on future investment decisions (Arkes & Blumer, 1992; Krems &  Zierer, 1994). Researchers have ana-

CONTEMPORARY ECONOMICS DOI: 10.5709/ce.1897-9254.173

Electronic copy
Electronic available
copy availableat:
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http://ssrn.com/abstract=2694193
Investors’ Expertise, Personality Traits and Susceptibility to Behavioral Biases in the Decision Making Process 339

lyzed susceptibility to cognitive and emotional biases it has been observed that neuroticism from the Big
among professional investors compared with individu- Five is positively correlated with a propensity toward
als who engage in the capital market on a more casual the sunk cost fallacy among Tehran investors (Sadi et
basis or even compared with complete novices (e.g., al., 2011). Baddeley et al. (2010) also found an asso-
Camerer & Johnson, 1997; Tyszka & Zielonka, 2002). ciation between particular Eysenck’s (1978) personal-
The results of these studies show that extensive experi- ity traits (impulsivity, venturesomeness and empathy)
ence in stock market investing does not protect people and susceptibility to social influence in financial deci-
from behavioral biases. Professional investors are par- sion making (herding) among British investors. From
ticularly vulnerable to divergence from rational action the abovementioned personality traits, impulsiv-
if a task is not transparent and there are no univocal ity was negatively linked to the degree of hyperbolic
indicators suggesting an appropriate solution (Garvey discounting and the level of risk aversion in another
& Murphy, 2008). In these cases, professionals often study conducted on British investors (Borghans et al.,
fall back onto schemas and/or heuristics. What is sur- 2008). Finally, impulsivity was also found to be a sig-
prising is that, after making the wrong decision, even nificant predictor of pathological gambling behavior
as new information arises that clarifies the problem, (Alessi & Petry, 2003). Although exploring investors’
professional investors can become more convinced personality traits seems to be a new and inspiring way
of having a good understanding of the issue and do to understand how investment decisions are made,
not change their initial stance (Verma, Baklaci & Soy- there has not yet been a sufficient number of studies
demir, 2008). This conviction that they are right grows, on this topic.
despite an influx of information indicating their error
in judgment. 1.6 Purpose and Hypotheses
The first aim of this research is to investigate the de-
1.5 Personality Traits and Susceptibility gree of susceptibility to behavioral biases (the certainty
to Behavioral Biases among Stock Market effect, the sunk cost fallacy, and mental accounting)
Investors among people with various levels of expertise in in-
Recent studies in behavioral finance incorporate vesting, i.e., frequent retail investors at the Warsaw
personality into the analysis of investors’ behavior Stock Exchange (see further: investors) and casual in-
to seek a deeper understanding of investors’ deci- vestors (students of the Warsaw School of Economics;
sion-making processes and their performances in see further: students). A second goal of this research is
the stock market (Borghans et al., 2008; Jadlow & to determine whether this susceptibility is correlated
Mowen, 2010). In particular, it has been observed with certain personality traits (impulsivity, venture-
that certain personality traits can influence inves- someness, and empathy). Because there is still a lack
tors’ preferences (Chira, Adams & Thornton, 2008), of data studies in behavioral finance literature inves-
risk attitudes (Mishra, Lalumiere & Williams, 2010) tigating the issues noted in this article (or the existing
and investment choices and outcomes (Belcher, 2010; results in behavioral finance literature are ambiguous),
Pompian & Longo, 2004). Therefore, some authors we treated our study as exploratory. Therefore, the fol-
state that individual differences in personality traits lowing hypotheses were tested:
among investors can explain their susceptibility to 1. The degree of susceptibility to behavioral biases
various behavioral biases in the stock market invest- (see: certainty effect, sunk-cost fallacy and mental
ment process (Mayfield, Perdue & Wooten, 2008). For accounting) in decision making varies depending
example, Durand, Newby & Sanghani, (2008) showed on an individual’s amount of expertise in stock
the positive relationship between extraversion and market investing.
agreeableness from the Big Five personality traits 2. Susceptibility to behavioral biases (see: certainty
(openness, conscientiousness, extraversion, agree- effect, sunk-cost fallacy and mental accounting)
ableness and neuroticism; Costa & McCrae, 1985) in decision making will be correlated with certain
and the susceptibility to disposition effect and over- personality traits (impulsivity, venturesomeness,
confidence among Australian investors. Additionally, and empathy) in all participants.

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340 Vol.9 Issue 3 2015 337-352 Marcin Rzeszutek, Adam Szyszka, Monika Czerwonka

2 Method details. The participants filled out the surveys in Pol-


ish, and the total distribution study response rate was
2.1 Participants and Procedure approximately 65%.
This study was conducted on a convenience sample,
with the subjects selected because they were available, 2.2 Materials
and the researchers did not consider selecting subjects The study questionnaire contained two parts. First,
as representative of the entire population of investors the participants completed a form featuring three situ-
in Poland (Freedman, 2009). Two hundred partici- ational scenarios (see, Appendix), in which they had to
pants represented two 100-person groups, which dif- choose how they would behave in a hypothetical situ-
fered in their level of expertise in stock market invest- ation when faced with a number of options. In each
ing. The first group was made up of 100 retail investors scenario, susceptibility to the behavioral biases noted
frequently investing at the Warsaw Stock Exchange. in the hypotheses was assessed. These scenarios have
These participants were recruited from among at- been used in classical studies on decision making. In
tendees of a conference organized by the Association the first scenario, adapted from Kahneman & Tver-
of Individual Investors and from among trainees of sky (1979), propensity toward the certainty effect was
advanced workshops organized by PERK, an organi- measured. The second scenario, adapted from Thaler
zation that provides education about capital markets (1999), checked susceptibility to mental accounting.
in Warsaw. The second group was made up of 100 The last scenario, adapted from Arkes and Blumer
students of the Warsaw School of Economics. These (1985), measured propensity toward the sunk cost
students had casual experience investing in the stock fallacy. The questionnaire also asked about the above-
market and planned to pursue careers connected to the mentioned demographics, including age, gender, edu-
stock exchange. Basic demographic information and cation and investing expertise.
information about the level of stock market expertise In the second part of the questionnaire, the partici-
is presented in Table 1. pants completed the IVE Questionnaire (Impulsivity,
As seen in Table 1, the study sample had similar Venturesomeness, Empathy Questionnaire; Eysenck
gender distribution across the two subgroups of par- & Eysenck, 2006). This tool is used to measure three
ticipants. The average age of the stock market inves- personality traits: impulsivity, venturesomeness, and
tors was 33.19 years (SD = 10.09) and among the WSE empathy. Impulsivity is defined as the pathological as-
students, the average age was 21.62 years (SD = 1.89). pect of risk-taking behavior and indicates a very strong
Among the stock market investors, 96 had completed tendency to undertake risky, unplanned activities, to
tertiary education and 4 had obtained PhDs. Among make quick decision and to have rash reactions. It is
the WSE students, 78 had completed secondary edu- primarily manifested in problems with self-control
cation and 22 had obtained MAs or BAs in econom- and the inability to delay gratification. Venturesome-
ics. The average number of years of investing on the ness measures not only readiness to undertake risky
Warsaw Stock Exchange was 6.56 (SD=1.95) among behaviors but also self-confidence, self-efficacy, persis-
investors and 1.76 (SD = 1.64) among students. Finally, tence in goal pursuit, and novelty seeking. Although
the average value of the stock portfolio (PLN) among this trait is similar to impulsivity, the two traits differ
investors was 1,49300 PLN (SD = 2,27796.89), and it in that impulsive people take risks without consider-
was 1,0450 PLN (SD = 1,5326.33) among students. ing the consequences of their actions, whereas ven-
In this study, in which a survey methodology was turesome people seek out challenges and take risks,
employed, we conducted a laboratory experiment that all the while taking into account the possible conse-
allowed us to isolate behavioral biases and personality quences of their actions. Finally, empathy is the ability
traits and measure their influence on investors’ deci- to perceive, understand and react to others’ emotions
sion-making processes. The questionnaires were in and take on others’ emotional perspectives (Eysenck
hard copy form and were delivered to the participants & Eysenck, 1978). The IVE comprises 54 items in the
in person so that they could also be informed about the form of questions with yes/no answers. Final scores are
anonymity of individual results and all other necessary calculated by totaling the “yes” answers to the items

CONTEMPORARY ECONOMICS DOI: 10.5709/ce.1897-9254.173

Electronic copy available at: https://ssrn.com/abstract=2694193


Investors’ Expertise, Personality Traits and Susceptibility to Behavioral Biases in the Decision Making Process 341

Table 1. Participants’ basic demographic information and stock market investment expertise

Years investing in the Value of stock


Group Gender Age Education
stock market portfolio (PLN)
1. Stock Men M = 33.19 Primary = 0 M = 6.56
market 53 SD = 10.09 Secondary = 0 SD = 1.95 M = 1,49300.00
investors Women Range Tertiary (MA or BA) = 96 Minimum = 2 SD = 2,27796.89
(n = 100) 47 28-62 PhD = 4 Maximum = 27

Men M = 21.62 Primary = 0 M = 1.76


2. Students 52 SD = 1.89 Secondary = 78 SD = 1.64 M =1,0450.00
(n = 100) Women Range Tertiary (MA or BA) = 22 Minimum = 0 SD = 1,5326.33
48 18-30 PhD = 0 Maximum = 4

(some are reverse-scored) on three subscales: impulsiv- sult, they were coded as irrational in accordance with
ity, venturesomeness, and empathy. The reliability coef- Kahneman and Tversky’s study (1979).
ficients for the three IVE subscales range from α = .76 To assess whether the investors differed from the
to α = .0.81 (Eysenck & Eysenck, 2006). The reliability students with regard to susceptibility to the certainty
coefficients for the subscales in this study were α = .79 effect, a chi² test of the independence of the two vari-
for impulsivity, α = .78 for venturesomeness, and α = .72 ables was performed. The results are shown in Table 2.
for empathy. The frequencies of rational answers by investors versus
students were compared, showing relative susceptibil-
3 Results ity to the certainty effect.
Statistical analyses were conducted using PASW Statis- A significant chi² result allows us to reject the
tics 18. To test the first hypothesis concerning the link null hypothesis about the independence of the two
between investing expertise and the degree or rational- variables and accept the alternative hypothesis, that
ity of decision making as measured through the three the two variables are somehow related. In the case of
behavioral biases contained in the exercises, a series of the certainty effect, the group of students behaved
chi² tests of the independence of two variables were significantly more rationally (39 rational answers)
conducted. Three comparisons were made. In each, than the group of investors (26 rational answers),
one variable was the group of participants (investors or chi² (1, N = 200) = 3.85; p<.05. The investors, thus,
students); the other variable was making a rational or were shown to be more susceptible to the certainty
irrational decision in each of the three exercises (see: effect than the students.
Appendix). For a rational answer (one that showed no The same analysis was performed to investigate
behavioral bias), a participant received 1 point. For whether the investors differed from the students with
an irrational answer (one that showed the bias), the regard to susceptibility to the sunk cost fallacy. The re-
participant received no points. For example, the first sults are shown in Table 3.
exercise in the questionnaire measured susceptibility In the case of the sunk cost fallacy, the difference
to the certainty effect. Option A was considered the in answers measuring susceptibility to the sunk cost
rational answer in the first part of the exercise; option fallacy between the investors and students was not sig-
C was considered rational in the second part (see: Ap- nificant, chi² (1, N = 200) = .10; ns.
pendix). These options had the greatest expected value. An identical analysis was performed to determine
Therefore, a subject received 1 point for this exercise if whether the investors differed from the students with
he/she circled both A and C and 0 points otherwise. regard to susceptibility to mental accounting. The re-
The other choices had lower expected values; as a re- sults are shown in Table 4.

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342 Vol.9 Issue 3 2015 337-352 Marcin Rzeszutek, Adam Szyszka, Monika Czerwonka

Table 2. Outcome of chi² test for frequency of rational answers of stock market investors and WSE students in the exercise
measuring susceptibility to the certainty effect

Stock market
The certainty WSE students Chi² df p
investors
effect
26 39 3.85 1 .041

Table 3. Outcome of chi² test for frequency of rational answers of stock market investors and WSE students in the exercise
measuring susceptibility to the sunk cost fallacy

Stock market
The sunk cost WSE students Chi² df p
investors
fallacy
31 29 .10 1 .762

Table 4. Outcome of chi² test for frequency of rational answers of stock market investors and WSE students in the exercise
measuring susceptibility to mental accounting

Stock market
Mental WSE students Chi² df p
investors
accounting
40 53 3.40 1 .061

Table 5. Means and standard deviations for personality traits among stock market investors and students (N = 200)

Stock market investors WSE students


(n = 100) (n = 100) t-test comparing
investors to students
M SD M SD

Impulsivity 7,55 3,60 8,45 3,41 -1,82#

Venturesomeness 9,15 3,24 10,06 3,14 -2,01*

Empathy 11,06 3,77 11,59 3,55 -1,02

Note: #p<.10; *p<.05.

In the case of mental accounting, we observed a trend from each other within the level of personality traits.
towards statistical significance, chi² (1, N = 200) = .061. A t-test for independent groups was conducted. The
The students’ group (53 rational answers) behaved in results are presented in Table 5, which shows means
a more rational way than the investors (40 rational and standard deviations for personality traits among
answers). the stock market investors and students. We performed
In the next stage of statistical analyses, we sought to a suitable analysis in regard to gender; however, no sta-
check whether the two groups of participants differed tistically significant differences were found.

CONTEMPORARY ECONOMICS DOI: 10.5709/ce.1897-9254.173

Electronic copy available at: https://ssrn.com/abstract=2694193


Investors’ Expertise, Personality Traits and Susceptibility to Behavioral Biases in the Decision Making Process 343

As shown in Table 5, the students were significantly bility to the certainty effect. We can accurately predict
more venturesome and marginally more impulsive rational answers to the certainty effect exercise based
than the investors. The two groups did not differ in on level of venturesomeness in 72% of our cases.
their levels of empathy. The results shown in Table 7 indicate that there is
To test the second hypothesis, logistic regression no relationship between impulsivity or empathy and
analyses were conducted. Susceptibility to behavioral susceptibility to the sunk cost fallacy in our sample (re-
biases was the outcome variable. Personality traits spectively, p = .434 and p = .480). There was a signifi-
(impulsivity, venturesomeness, and empathy) were the cant relationship between venturesomeness (p < .05)
predictor variables. We note that logistic regression is and susceptibility to the sunk cost fallacy. Specifically,
the method of choice for analyzing results of studies the more venturesome one was, the more likely he
in which the dependent variable is dichotomous while was to give a rational answer in the sunk cost exer-
the independent variables are interval or categorical cise (Exp (B) > 1). We can accurately predict rational
(Freedman, 2009). This was the case in our study. It is answers in the sunk cost exercise based on venture-
possible to make use of discriminant analysis in these someness in 74% of our cases.
cases; however, it was found that logistic regression The results in Table 8 show that there was no rela-
outperforms discriminant analysis for non-normal tionship between impulsivity or empathy and tenden-
classification problems, which was also the case in our cy to mental accounting in our sample (p = .620 and
study. Additionally, while ordinary regression uses or- p = .668, respectively). There was, however, a relation-
dinary least squares to search for a best fitting line and ship between venturesomeness (p < .001) and suscepti-
addresses coefficients that predict the change in the bility to mental accounting. Specifically, greater venture-
outcome variable for one unit change in the predictor someness was linked to a lower susceptibility to mental
variable, logistic regression estimates the probability of accounting when making decisions (Exp (B) > 1). On
an event occurring (Freedman, 2009). Furthermore, the basis of venturesomeness levels, we can predict ra-
while in linear regression, the relationship between tional answers in the mental accounting exercise in 62%
the outcome and the predictor variables is linear; this of our cases.
assumption is not made in logistic regression. Taking To verify whether the relationship between venture-
the abovementioned factors into account, in our study, someness and susceptibility to the studied behavioral
we used this statistical method because the outcome biases was identical or different in the two groups of
variable was categorical (see: making a rational or ir- participants, we conducted a logistic regression in
rational decision in each of the three exercises) and the which the predictors were the particular group of
predictor variables were continuous (see: personality participants, venturesomeness, and the interaction
traits). Finally, we emphasize that the participants’ age between these two variables. In other words, member-
and other demographics (gender, education) were not ship in one of the two participant groups was treated as
statistically significant variables in our model; conse- a moderator of the relationship between venturesome-
quently, we did not control for them in our analyses. ness and the probability of making rational decisions
Three analyses were performed, one for each of the in the three exercises.
exercises in the questionnaire. The results are shown The results shown in Table 9 indicate that the in-
in Tables 6, 7, and 8. teraction between group and venturesomeness was not
The results shown in Table 6 indicate that there was significant; thus, group belonging did not moderate
no significant relationship between impulsivity or em- the relationship between venturesomeness and mak-
pathy and susceptibility to the certainty effect in our ing rational decisions.
sample as a whole (respectively, p = .967 and p = .14). To verify whether the relationship between impul-
There was, however, a significant relationship between sivity and susceptibility with the studied behavioral bi-
venturesomeness and susceptibility to the certainty ef- ases was identical or different in the two groups of par-
fect (p < .05). Specifically, the more venturesome a par- ticipants, we conducted a logistic regression in which
ticipant was, the more likely he was to give a rational the predictors were the particular group of participants,
answer (Exp (B) > 1) and thus, the lower his suscepti- impulsivity, and the interaction between these two vari-

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344 Vol.9 Issue 3 2015 337-352 Marcin Rzeszutek, Adam Szyszka, Monika Czerwonka

Table 6. Logistic regression analysis with personality traits as predictors of susceptibility to the certainty effect in the
sample as a whole (N = 200)

Personality traits B Exp (B) Wald df p

Impulsivity -.03 .97 .56 1 .967

Venturesomeness .11 1.11 4.01 1 .041

Empathy -.07 .94 2.21 1 .14

Table 7. Logistic regression analysis with personality traits as predictors of susceptibility to the sunk cost fallacy in the
sample as a whole (N = 200)

Personality traits B Exp (B) Wald df p

Impulsivity -.04 .96 .61 1 .434

Venturesomeness .12 1.12 4.56 1 .032

Empathy -.03 .97 .48 1 .480

Table 8. Logistic regression analysis with personality traits as predictors of susceptibility to mental accounting in the
sample as a whole (N = 200)

Personality traits B Exp (B) Wald df p

Impulsivity -.02 .98 .25 1 .620

Venturesomeness .20 1.22 14.28 1 .001

Empathy -.01 1.02 .18 1 .668

ables. In other words, membership in one of the two we conducted a logistic regression in which the predic-
participant groups was treated as a moderator of the tors were the particular group of participants, empa-
relationship between impulsivity and the probability of thy, and the interaction between these two variables. In
making rational decisions in the three exercises. other words, membership in one of the two participant
The results shown in Table 10 indicate that the in- groups was treated as a moderator of the relationship
teraction between group and impulsivity was not sig- between empathy and the probability of making ratio-
nificant; thus, group belonging did not moderate the nal decisions in the three exercises.
relationship between impulsivity and making rational The results shown in Table 11 indicate that the
decisions. interaction between group and empathy was not sig-
To verify whether the relationship of empathy and nificant; thus, group belonging did not moderate the
susceptibility to the studied behavioral biases was relationship between empathy and making rational
identical or different in the two groups of participants, decisions.

CONTEMPORARY ECONOMICS DOI: 10.5709/ce.1897-9254.173

Electronic copy available at: https://ssrn.com/abstract=2694193


Investors’ Expertise, Personality Traits and Susceptibility to Behavioral Biases in the Decision Making Process 345

Table 9. Analysis of interaction in logistic regression, where group (stock market investors vs. WSE students) is a modera-
tor of the relationship between venturesomeness and likelihood of making a rational decision in each of the three
exercises

B Exp(B) Wald df p

The certainty effect


-.01 .99 .01 1 .940
Group x V

The sunk cost fallacy


.13 1.14 1.44 1 .230
Group x V

Mental accounting
-.06 .94 .40 1 .528
Group x V

Note: V – venturesomeness; B – unstandardized regression coefficient; Exp(B) – standardized regression coefficient; Wald –
Wald test result; df – degrees of freedom; p – statistical significance.

Table 10. Analysis of interaction in logistic regression, where group (stock market investors vs. WSE students) is a modera-
tor of the relationship between impulsivity and likelihood of making a rational decision in each of the three exercises

B Exp(B) Wald df p

The certainty effect


-.17 .84 3.60 1 .068
Group x I

The sunk cost fallacy


.01 1.01 .02 1 .875
Group x I

Mental accounting
.03 1.03 .13 1 .723
Group x I

Note: I – impulsivity; B – unstandardized regression coefficient; Exp(B) – standardized regression coefficient; Wald – Wald test
result; df – degrees of freedom; p – statistical significance.

Table 11. Analysis of interaction in logistic regression, where group (stock market investors vs. WSE students) is a modera-
tor of the relationship between empathy and likelihood of making a rational decision in each of the three exercises

B Exp(B) Wald df p

The certainty effect


-.05 .95 .40 1 .529
Group x E

The sunk cost fallacy


-.06 .94 .46 1 .497
Group x E

Mental accounting
.03 .13 .13 1 .722
Group x E

Note: E – empathy; B – unstandardized regression coefficient; Exp(B) – standardized regression coefficient; Wald – Wald test
result; df – degrees of freedom; p – statistical significance.

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346 Vol.9 Issue 3 2015 337-352 Marcin Rzeszutek, Adam Szyszka, Monika Czerwonka

4 Discussion vestors compared with the students may be attributed


First, statistical analyses demonstrated that suscep- to other factors (e.g., expert overconfidence).
tibility to behavioral biases depends on the level of We observed greater venturesomeness and mar-
expertise in stock market investing. Second, in our ginally higher impulsivity among the students than
sample, we observed an influence of certain personal- among the investors (Table 5). This finding may be the
ity traits on susceptibility to behavioral biases. result of the students’ youth relative to the investors’
We found not only that frequent retail investors age. Moreover, we can assume that students have taken
are susceptible to various behavioral biases when fewer risks with real money thus far in their lives than
making decisions but also that the degree of suscepti- investors, who work with real cash. Therefore, for the
bility is stronger in this group than among those who typical student participant, our study was a purely hy-
are only casually engaged in investing, i.e., students pothetical situation, which favored making more risky
(Tables 2, 3 and 4). These findings are in line with and impulsive decisions as has also been observed in
earlier studies indicating that experts are susceptible other research (Garvey & Murphy, 2008).
to behavioral biases (Braun & Yaniv, 1992). Szyszka Among the studied personality traits, only venture-
(2007) showed that a lack of understanding of the someness was statistically significant and influenced
intricacies of finance and the capital market can, the rationality of the investors’ decisions. A negative
paradoxically, improve rationality of decisions. In his correlation was observed between venturesomeness
survey studies, students of fine arts and music were and susceptibility to all the behavioral biases stud-
less susceptible to overconfidence and were more ac- ied, i.e., the certainty effect, the sunk cost fallacy, and
curate in their estimates of the probability of market mental accounting (Tables 6, 7 and 8). In other words,
events than a group of stock market traders and edu- in our sample, a higher level of venturesomeness was
cated investors. linked with a lower probability of behavioral biases.
Our results confirmed that the tendency to display To explain this result, we note that venturesome-
behavioral biases is a highly automatized process, so ness measures different aspects of risk-taking tenden-
both experts and amateurs in a given domain, and even cies and is seen as a characteristic of people who are
laypeople, might be unaware of the influence these bi- fully conscious of the risk they will take but have also
ases have on their decisions (Stephan, 1998). Moreover, fully decided to take it (Eysenck & Eysenck 1978). It
there is little possibility of conscious control of these has been noted that a high level of risk aversion among
biases. Additionally, other research has shown that ex- stock market investors is positively correlated with
perts in various domains often show a strong tendency various behavioral biases (e.g., the attachment effect,
toward overconfidence when making critical decisions see: Corter & Chen, 2006), or it results in too slow of
and sometimes intentionally use different rules of a diversification of investment portfolios and reaction
thumb to simplify the decision-making process (Rosz- to changes in the capital market (Weller & Tikir, 2011).
kowski & Grable, 2005). Furthermore, Tetlock (2005) Additionally, some authors stressed that the higher the
notes that, as a way of maintaining self-esteem and risk tolerance is among market investors, the more
professional reputation, professionals are less capable optimal and profitable their investment decisions are
of admitting to making mistakes and correcting them (Hopfensitz & Wranik, 2009; Sjoberg & Engelberg
than laypeople. Finally, there is some evidence on the 2009; Sultana & Pardhasaradhi, 2010). However, posi-
role of age differences in decision making under risk tive correlations have been observed between venture-
and uncertainty because these age differences could re- someness, as measured with the IVE scale, and ex-
flect other life experiences in addition to professional traversion and openness to experience from the Big
expertise. In particular, it was found that age may be Five Model. These latter two traits predicted the ef-
negatively correlated with the ability to make optimal fectiveness of investment fund management (Camgoz,
decisions under risk and uncertainty (Dror, Katoan Karan, & Ergeneli, 2011). Venturesomeness consists of
& Mungur, 1998). Notably, age was not a statistically self-confidence, self-efficacy, persistence in goal pur-
significant variable in our model, so the relative lack of suit, and readiness to undertake risky behaviors and
rationality in decision making observed among the in- seek out new challenges while considering the possible

CONTEMPORARY ECONOMICS DOI: 10.5709/ce.1897-9254.173

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Investors’ Expertise, Personality Traits and Susceptibility to Behavioral Biases in the Decision Making Process 347

consequences of these behaviors (Eysenck & Eysenck, avoidant (Eysenck & Eysenck, 2006). Taking into con-
2006). Although no studies to date have been con- sideration the high level of stress and competition in
ducted using the IVE scale in the context of the behav- stock investing, we can again suppose that the above-
ioral biases mentioned in this study, we suspect that mentioned personality characteristics would not lead
the abovementioned components of venturesomeness to success as a market investor (Benos, 1998).
can compose the personality profile of an effective and In conclusion, a few limitations of this research
simultaneously rational market investor. should be noted. First, for the expert group, the aver-
No statistically significant interaction effect was age number of years investing at the stock exchange
found in the logistic regression (Table 9), indicating remains low (6.56), so the representativeness of this
that belonging to one of the two groups of participants sample may be questioned. Second, including person-
(investors versus students) was not a moderator of the ality traits in financial analysis is difficult due to the
relationship between venturesomeness and the likeli- problems with defining personality traits in financial
hood of making a rational decision in each of the three terms. In particular, it is not altogether clear how the
exercises in our questionnaire. In other words, this personality traits studied here are psychometrically
trait equally important for making rational decisions linked to susceptibility to behavioral biases. We were
in each of the exercises. Perhaps this finding is a result also concerned with the choice of the personality ques-
of the homogenous nature of our sample (all of whom tionnaire, which measures “cross-domain” risk-taking
where market investors, differing only in terms of their tendencies (impulsivity and venturesomeness). There
professional/amateur status), and the nature of the re- is a question about whether we can extrapolate risky
lationships would differ if representatives of entirely lifestyle activities (e.g., high-risk sports participa-
different professions were included in the analysis. tion) to financial risk taking. Although an increasing
This study did not support the significance of the number of studies use this methodology (Mishra et
other studied personality traits, impulsivity and em- al., 2010; Sadi et al., 2011), their results vary, requiring
pathy, on susceptibility or resistance to behavioral further investigation.
bias among investors (Tables 6, 7 and 8). Although
the coefficients were statistically insignificant, the sign 5 Conclusions
of the coefficients could be interpreted as suggestive Our paper provides new knowledge about the psycho-
evidence that individuals with the traits of impulsiv- logical determinants of decision making in the capital
ity and empathy are more susceptible to all three of market. We not only confirm that pure experience does
the biases. This interpretation could partially explain not help in making more rational investment decisions
the fact that these personality types were under-rep- but also show that susceptibility to behavioral biases
resented in the sample (Mayfield et al., 2008). High may depend on personality traits. Our results suggest
impulsivity reflects a pathological aspect of risky be- the necessity of better educating investors to make
havior, an inability to control one’s reactions, a dis- them aware of potential psychological traps. However,
regard for social norms, and an inability to maintain we must remember that education does not guarantee
long-term efforts (Eysenck & Eysenck, 2006) and is success because personality traits may also determine
linked to various abnormal behaviors, such as gam- one’s attitude and behavior in a stock market.
bling addiction (Mishra et al., 2010) and psychoactive
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Investors’ Expertise, Personality Traits and Susceptibility to Behavioral Biases in the Decision Making Process 351

Appendix ema, you discover that you have lost the ticket. You
do, however, have a 20 PLN bill in your pocket. Do
Appendix 1. Exercise measuring susceptibility you spend another 20 PLN to buy another ticket, or
to the certainty effect do you decide not to see the movie?
B. Now, please imagine that you have decided to go
EXERCISE 1 see a movie but have not yet bought a ticket. As
Please imagine that you must choose between options you leave your home, you take two 20 PLN bills
A and B. (Please circle the preferred option): with you. After entering the cinema, you discover
A. A lottery in which: that you have lost 20 PLN. In this situation, do you
• You have an 80% probability of winning 4,000 PLN. spend the other 20 PLN to buy a ticket, or do you
• You have a 20% probability of not winning any- decide not to see the movie?
thing.
B. A certain win of 3,000PLN.

Now, please choose between options C and D:


C. A lottery in which you could win:
• 4,000 PLN with a probability of 20%.
• Nothing, with a probability of 80%.
D. A second lottery in which you could win:
• 3,000PLN with a probability of 25%.
• Nothing, with a probability of 75%.

Appendix 2. Exercise measuring susceptibility


to the sunk cost fallacy

EXERCISE 2
As the president of a large aviation company, you have
invested 10 million dollars in a development project.
Its goal was to build an airplane that would quickly
cover the distance between Europe and the USA.
When your project is 90% complete, a rival company
announces that it is introducing an identical plane
onto the market, which, as it turns out, is much more
economical to use than yours. In this situation, would
you invest the final 10% of the costs to complete the
project (option A), or would you instead decide to im-
mediately abandon it (option B)? (Please circle the op-
tion you would choose).

Appendix 3. Exercise measuring susceptibility


to mental accounting

EXERCISE 3
Please imagine the following two situations, A and B,
and circle the behavior that you would choose in each:
A. You have decided to go see a movie, and you have
bought a ticket for 20 PLN. After entering the cin-

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