Individual Wealth Management: Does Self-esteem Matter?

Abstract

Self-esteem measures confidence in one’s abilities. Prior literature has shown that higher selfesteem can also affect individual financial decision making through an increased willingness to invest in risky assets and motivation to enhance self image through wealth accumulation. However, self-esteem can also lead to wealth-destroying investment behaviors due to overconfidence and an unwillingness to accept inevitable losses. Using the Rosenberg Selfesteem Scale included in the National Longitudinal Survey of Youth, we model wealth and portfolio allocation as a function of self-esteem, socioeconomic and demographic variables. Selfesteem is positively associated with an increase in net worth between 1994 and 2004, and with the proportion of a household portfolio held in investment assets. This study adds to the literature on psychological determinants of optimal household portfolio allocation by providing evidence that the positive effects of self-esteem outweigh the negative financial behaviors identified in prior literature.

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