A Behavioral Finance Study: Effect of Personal Characteristics on Risk Preferences and Investment Decisions of Vietnamese Investors

Abstract

Vietnam's financial investing market, especially the stock market, overcame the "Year of Covid-19" spectacularly with an exceptionally strong recovery, record-high liquidity, and the enthusiastic participation of new investors, surpassing all expectations.Now that the markets are expanding fast, individual investors and financial advisors need to upgrade their understanding of the investing markets, and be ready to adapt to the vast wave of newcomers.It is, therefore, necessary to explore behavioral factors including emotions and cognition that play a significant role in explaining investors' decision making process, so as to help the investors as well as financial advisors make better predictions and decisions for their business. Research purpose: This research explores the behavioral characteristics influencing risk preferences and investment decisions of Vietnamese individual investors. The combination of The Big Five Personality Model and Cognitive Reflection Test constructs an investor characteristic profile, which hinders a correlation with investors' risk aversion and investment decision-making. Research motivation:The motivation for this research stems largely from the need of knowing the many diverse factors that might influence risk behavior, as well as the need to better understand how behavioral traits might influence risk choices connected to investing.It contributes to not only behavioral finance theory but also general economic analysis and professional practices.Research design, approach, and method: The study utilizes a sample of 321 investors and potential investors on the Big Five personality scales and the Cognitive Reflection Test.The scales for the financial dimensions are based on concepts developed from extant literature.The collected data are analyzed using SPSS with tests include Cronbach's Alpha, Exploratory Factor Analysis, regression, and one-way ANOVA with post hoc test in Bonferroni correction. Main findings: Neuroticism, extraversion, and conscientiousness were found to have a significant direct influence on risk aversion; while agreeableness and openness to experience have an inverse relationship with risk aversion. Performance in the Cognitive Reflection Test does provide evidence on risk preferences, the relationship of which is non-linear. Risk aversion negatively affects investment decision. Practical/managerial implications:Awareness of the influence of specific personality traits in financial decision making would help financial planners tailor products more effectively to cater for the understanding and lifestyle of investors.Several recommendations regarding the discovered relationships are put forward to further assist individual investors as well as investment advisors in professional practice.

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