How personality traits impact decisions around debt and investing

“Knowing yourself is the beginning of all wisdom.”

— Aristotle

It’s become a cliche for personal finance writers to repeat platitudes like “personal finance is personal.”

While it is true that what is considered a “good” financial decision will be different for each person, most personal finance writers fail to help their readers understand how to make financial decisions tailored to their unique circumstances. They duck the hard work by slapping on another broad platitude like “make financial decisions based on your goals and preferences.”

Personal finance is personal, and many struggle with money because they do not connect their financial decisions to their personality.

I recently published an article discussing how you can increase happiness by making purchases that align with your personality traits. The first problem is that many people haven’t thought too much about their personality traits — making it nearly impossible to make financial decisions connected to their personalities.

To review the “big five” personality traits are:

1. Openness — Very open people tend to be creative and adventurous. In contrast, those with a low level of openness are more practical people that focus on the traditional ways of doing things.
2. **Conscientiousness — **Highly conscientious people have a high degree of self-control, while those with low levels of conscientiousness tend to be impulsive.
3. Extraversion — Extraverts are outgoing, while introverts are more reserved.
4. **Agreeableness — **Agreeable people often put other people’s needs ahead of their own and look to cooperate rather than compete. Non-agreeable people tend to lack empathy and focus on their advancement.
5. Neuroticism — Describes how frequently someone feels negative emotions like fear, anxiety, guilt, or sadness.

In this post, I will review research highlighting how your personality traits may help (or hurt) your ability to build wealth.

The relationship between wealth accumulation and personality traits

A 2011 paper studied the relationship between the assets and debts of British citizens and their personality traits.

The researchers studied thousands of people over 17 years to determine if certain personality traits were associated with better financial outcomes — more assets and less debt.

They broke the data set into two categories:

1. Single people
2. Couples

This provided interesting results because the psychology of a single person making financial decisions is much different than the differing psychology of two people who have to make joint financial decisions. Anyone who has had joint finances with another person knows how hard it can be to get on the same page regarding money.

Here’s a summary of the most interesting results from the study.

Extroverts are surprisingly bad with money

For single people, Extroverts had the most debt compared to any other personality trait. A one standard deviation increase in extroversion was associated with a 21.7% increase in consumer debt.

For couples, extroversion had a negative correlation with asset holdings. The higher a couple scored on extroversion, the fewer assets they held relative to the average couple.

Extroverts were also the least likely to invest in the stock market. This is particularly harmful in their ability to accumulate wealth in the long run, as high-risk assets like stocks also have the highest expected return on investment over the long run.

Single extroverts have the most debt, extroverted couples have the least assets, and all extroverts are the least likely to invest in stocks. This paints a pretty poor picture of how extroverts manage money. To quote the researchers:

“Our findings suggest that being assertive, ambitious and energetic — i.e. those characteristics associated with extraversion — are positively associated with the amount of unsecured debt held, yet negatively associated with the value of financial held by couples.”

I wonder if these disappointing results for extroverts might be similar to the discussion of how optimism impacts financial decisions. In a past article, I reviewed research that shows optimism had mixed impacts on financial decision-making until the researchers removed the “extreme optimists” — the top 5% most optimistic people — from the sample. The remaining “rational optimists” demonstrated excellent money management habits.

I would be curious what the results for extroversion would be if we removed the 5% most extroverted people or the “extreme extroverts” from the sample. It’s not difficult to imagine the most extreme extroverts behaving similarly to the most extreme optimists in their overspending and undersaving. Pure conjecture on my part, but it could be an interesting area of future research.

For couples, the personality trait most associated with consumer debt was agreeableness — a personality trait associated with putting other people’s needs ahead of your own. A one standard deviation increase in agreeableness was associated with a 22% increase in consumer debt.

Outgoing and energetic single people and couples that put other people’s needs ahead of their own were the two groups with the most debt. When framed in that way, it’s easy to imagine a young single person who loves to socialize, eat out, and travel and a middle-aged married couple who shoulder the financial burden of their children and elderly parents.

The least surprising result is that the personality trait that had a negative correlation with consumer debt was conscientiousness, which describes people with a high-level of self-control.

For single people, no personality trait was particularly associated with asset accumulation.

The takeaway

If you are an extrovert, take a deep breath.

This study was correlational, not a causal study. We don’t know for sure that someone’s extroversion is causing poor financial decisions.

Even if there is a causal relationship between extroversion and poor financial management, that does not condemn you to a bleak financial future. Not all extroverts are destined to rack up credit card debt or under-invest in stocks and other wealth-building assets.

It is, however, useful to be aware of how your personality traits might impact your natural tendencies with money. But never forget you control your destiny. Think of it like someone who does a test and finds out their genetics make it more likely they will contract a certain medical condition.

Increased odds do not equal certainty.

In the same way, we make daily choices with our diet, exercise, and sleep habits to minimize the odds of negative health outcomes — we can also create sound financial habits like tracking our spending and building a regular savings plan.

If you haven’t already, check out this free online test to get an idea of what your strongest personality traits are. Knowing your personality traits is the first step in creating a financial plan that plays to your strengths.

Stay tuned for more posts covering how you can connect your financial life with your personality for a truly “tailored” financial plan.

Your Ph.D. In Money

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Check out our four standalone sections on MOAM.

• The Financial Freedom Equation. Where the bulk of my “personal finance 101” writing on things like expense tracking and budgeting will live + free access to my Audiobook of the same name.
• The Rational Investor. Where everything I have ever written about investing will be housed. It’s also where paid subscribers will access the Audiobook of The Rational Investor once it is produced.
• Money on my Mind. Where we dive deep into the research on behavioral finance and help you make financial decisions with confidence.
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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.

Contributed by Ben Le Fort