How Personality Affects Your Investment Habits

Bad Financial Decisions Decrease Physical Health

Feb 27, 2008

Overly optimistic people may make bad investment decisions, which leads to losing money. And, here's how financial loss causes painful physical health conditions.

Your personality - whether you're pessimistic, optimistic, or overly optimistic - affects your investment habits. In turn, investing unwisely and losing money affects your physical health.

Extreme optimists may make more money mistakes. Optimistic people can have a solid understanding of finances and investing, but a research study about money shows that too much optimism can lead to finance and investment mistakes. Extremely optimistic people tend to have short planning horizons and can make foolish money decisions.

When Duke University professors Manju Puri and David Robinson compared optimists and extreme optimists, they found that small doses of optimism can lead to wise financial decisions. However, extreme optimists may make irresponsible money moves and lose money.

“The differences between optimists and extreme optimists are remarkable, and suggest that over-optimism, like overconfidence, may in fact lead to behaviors that are unwise,” says Dr Puri.

How do you know if you’re an extreme optimist? Bank balance aside, extreme optimists tend to work fewer hours, save less money, are less likely to pay off their credit card balances regularly, and have a higher proportion of individual stocks in their portfolios. Extreme optimists are also more likely to be day traders. Run-of-the-mill optimists, on the other hand, work longer hours, believe their income will grow over the next five years, plan to retire later or not at all, and save more money.

How Financial Loss Decreases Physical Health

Losing money activates fear and pain in the brain, according to Dr Ben Seymour from the Wellcome Trust Centre for Neuroimaging at University College in London. When research participants lost money through gambling, the area in their brains normally associated with fear and pain was triggered. The same region allows the brain to predict imminent danger and activates defensive actions – leading Dr Seymour to conclude that there’s biological truth behind the clichéd phrase “financial pain.”

The brain’s ancient evolutionary system of motivation, fear, and pain has been hijacked by contemporary financial losses and gains. That is, we want to avoid losing money the same way we want to avoid experiencing pain because fiscal loss and physical pain are connected in our brains. Even just anticipating or thinking about losing money activates that region of our brains (the striatum). This is the psychology of money – or more accurately, the physiology of money.

Taking it a step further, Dr Seymour believes that studying the brain’s ability to predict and manage financial losses may provide insights into why some people gamble more than others. Understanding how personality affects investment habits and the effect of financial loss on physical health may even lead to new ways of treating gambling addictions.

The copyright of the article How Personality Affects Your Investment Habits in Psychology is owned by Laurie Pawlik-Kienlen. Permission to republish How Personality Affects Your Investment Habits in print or online must be granted by the author in writing.