How Your Personality Can Affect Your Portfolio

Can certain personality traits explain investors’ risk tolerance and investment decisions?

A forthcoming paper suggests it might. Specifically, the authors found that two personality traits—neuroticism and openness—significantly affect how investors perceive the economy, financial markets and their likelihood to buy stocks or stock funds, with those who are less neurotic and more open tending to have a higher allocation to equities.

While the authors primarily studied investors in the U.S., they also identified similar patterns among investors in Germany, Australia and China.

The Wall Street Journal spoke with two of the paper’s co-authors, Hongjun Yan, a professor of finance at DePaul University’s Driehaus College of Business, and Cameron Peng, an assistant professor of finance at the London School of Economics, about their findings. Zhengyang Jiang, an associate professor of finance at Northwestern University’s Kellogg School of Management, is the paper’s other co-author.

Here are edited excerpts of the conversation.

WSJ: How can psychology theories help to explain investor behaviour?

YAN: Investors often have very different portfolios. Traditionally, economists focus on risk aversion and market expectations, but in this paper we argue that well-known personality traits—extroversion, agreeableness, openness, conscientiousness and neuroticism—provide a new dimension to explain investors’ choices.

In the Winnie-the-Pooh stories, Tigger is always excited and optimistic while Eeyore is always down and pessimistic. You might expect their investment portfolios to look very different and reflect their overall outlook.

WSJ:How did you study this topic?

PENG: We collaborated with the American Association of Individual Investors, administering a survey to over 3,000 of its members. We collected information on their personality traits, market expectations, and investment decisions. The AAII sample is predominantly wealthy, white, older men. And when they make investment decisions, they are usually quite big, involving hundreds of thousands or even millions of dollars. Their actions can have a real impact on the market.

WSJ:What did you find?

YAN: We found that neuroticism and openness are correlated with investors’ beliefs about the market and their likelihood to buy equities. We were surprised that agreeableness wasn’t important when it comes to investment beliefs or decisions since other researchers have found that agreeableness tends to be correlated with other economic outcomes, like success in negotiating wages.

WSJ: How does neuroticism affect investors’ decisions?

YAN: Someone who is more neurotic has a very different outlook than someone who is not in terms of stock-market expectation. For example, an investor ranking in the middle of the [neurotic] scale might expect an annual stock-market premium of about 6%. But investors at the top of the scale are likely to only expect a 4% stock-market premium, while investors at the bottom of the neuroticism scale are likely to expect an 8% stock-market premium.

PENG: Neuroticism also affected how respondents invested their money in their actual accounts. More neurotic investors were less likely to own equities. Very neurotic investors invested about 56% of their portfolio in equities, while investors who weren’t neurotic invested about 64% of their portfolio in equities.

WSJ:How does openness affect investors’ decisions?

PENG: Investors ranking high for openness were more likely to entertain the possibility of extreme events, like a market crash or a run—really any scenario when the market goes up or down by more than 20%.

Investors who were very open were somewhat more likely to take risks by buying equities. Specifically, investors who were the most open were 3 percentage points more likely to own more equities than investors who weren’t. They had about 62% of their portfolio in equities, while investors who were less open had about 59% of their portfolio in equities.

WSJ: What did you find when you looked at data from other countries?

YAN: We find that neuroticism and openness affect market perceptions and decisions fairly consistently across different data sets. That’s quite remarkable considering the culture and investing environment in each country is very different.

WSJ:What are the study’s implications?

YAN: Personality traits may shape investors’ decisions in ways that many economists have yet to seriously consider. Our research, for instance, also suggests more extroverted and more neurotic investors’ investment choices could be highly influenced by social interactions, or what their friends or colleagues are doing. That insight goes beyond economists’ traditional framework, which focuses on risk tolerance and market expectations, and could help researchers better explain investor behaviour.

PENG: Large asset-management firms or financial planners could spend time getting to know their clients’ personalities and use those insights when they make investment recommendations. Maybe they could encourage investors who tend to be neurotic to be a little less pessimistic.

Note: Usual Northern Sea Route shown for illustrative purposes Source: Sea Legend Daniel Kiss/WSJ

Shipping cargo through an Arctic shortcut never made economic sense—until now.

Climate change and war in the Middle East are flipping the math that previously kept ships plying longer routes from Asia to Europe. A Chinese company on Saturday is starting the first regular cargo service to Europe through Arctic waters, seeking to reap the benefits of quicker travel time and less fuel use.

The shipper Sea Legend will dispatch the Dubai Tower from Ningbo, China, to Felixstowe in the U.K. on what it calls the Arctic Express, following a route along Russia’s north coast. The voyage by the vessel, which is capable of carrying 1,740 20-foot containers, is the biggest commercial step in the Arctic since a Maersk containership first completed the route in 2018.

Global warming is a big factor behind the new route, but it is not the only one. Nearly half the Arctic region’s summer ice—an area four times the size of Texas—has melted over five decades, clearing a fairly reliable path in the summer months. Meanwhile, high oil prices and attacks by Houthi rebels in the Red Sea have made the traditional routes costlier and more dangerous.

Members of China's 16th Arctic Ocean scientific expedition team take selfies on the ice surface. — Members of a Chinese scientific expedition team on surface ice in the Arctic Ocean this week. Wen Jinghua/Xinhua/ZUMA Press

Beyond that, Beijing has ambitions to play a role in the Arctic’s future, lending a geopolitical dimension to the Chinese company’s shipping route.

Last year Sea Legend completed a trial run from Asia to Europe in a record 20 days. That is roughly half the time of a voyage via Africa’s Cape of Good Hope that many carriers now take because of the Red Sea uncertainty.

Fuel accounts for 70% or more of the costs while at sea, said Alan Murphy, a former Maersk analyst who runs research firm Sea-Intelligence.

Saving fuel by shortening the journey doesn’t automatically make a route profitable. Insurance premiums for the Arctic are 40% higher than the Cape of Good Hope route, said Jonathan Steenberg, an economist at credit insurer Coface. Sea Legend’s Arctic vessels are relatively small. And even after warming, an icebreaker is still sometimes needed to help the cargo ship.

But if the ship can go without an icebreaker, Coface said the Arctic route is now cheaper than a Cape of Good Hope voyage in some circumstances. It estimated that at current oil prices of around $90, the cost of shipping liquid bulk such as liquefied natural gas could drop roughly 33% compared with the Cape of Good Hope route, while dry bulk goods such as cereals would cost about 8% less.

The container ship Istanbul Bridge being unloaded by large blue and red cranes at the port of Gdansk. — A containership operated by Sea Legend in the port of Gdansk, Poland. jackowski/epa/Shutterstock

The route is only passable in the summer and fall. Sea Legend plans eight voyages between August and late October, before conditions get too icy.

“It’s not the Suez Canal but it’s a significant number for the Arctic. It shows there is potential,” said Malte Humpert, founder of the U.S.-based Arctic Institute and author of a book on Chinese shipping in the Arctic.

Even in summer, ships have to navigate around dangerous ice floes and deal with rapidly changing weather. By the end of the shipping season in October, the sky is dark most of the time.

A Russian tanker suffered serious damage to its hull while sailing along the Arctic route despite being assisted by an icebreaker, its insurer, AlfaStrakhovanie, said Thursday, adding that it paid out roughly $650,000.

Coface estimates 3.5% of trade among East Asia, Europe and North America will be able to use Arctic routes within the next five years, representing $64 billion in goods.

Last summer, a record 23 cargo ships transited the Northern Sea Route, which hugs Russia’s north coast. That is tiny compared with the Suez Canal, where more than 30 ships transited daily.

Western companies that want to follow in Sea Legend’s path have to navigate treacherous politics. Russia claims sovereignty over the entire Northern Sea Route and permits for ship traffic are issued by its state-controlled nuclear operator, Rosatom.

Aerial view of a port with many cargo ships, red cranes, and rows of stacked shipping containers. — The Dubai Tower’s route will begin in the Chinese port of Ningbo. Huang Zongzhi/ZUMA Press

“Western companies are in a tricky position,” said Humpert of the Arctic Institute. “At what point do they jump back in the water? When does it become economically necessary, and how do you weigh that against environmental risks and the political dimension?”

An alternative Arctic route, the Northwest Passage that connects the Atlantic and Pacific oceans via the Canadian Arctic, is less passable because it is dominated by narrow waterways where ice gets bunched up. The highest number of cargo ships completing the passage in a year was 13, in 2023.

China has declared itself a near-Arctic state despite not having access to Arctic waters. It depends on Russia’s goodwill to use the Northern Sea Route.

“Beijing is concerned that if they don’t establish a significant strategic presence in the Arctic now, it’s going to be more difficult in the future,” said Marc Lanteigne, expert in polar geopolitics at the Arctic University of Norway in Tromsø. However, he said, “China needs to be careful not to give the impression that they are trying to challenge the strategic order in the Arctic.”

Sea Legend didn’t respond to requests for comment.

Any polar venture contributes to China’s quest to master Arctic travel. The country also has three icebreakers and a support vessel currently on a monthslong scientific expedition north of Greenland. Scientific and commercial voyages can yield data about natural resources awaiting below melting ice caps and information for positioning nuclear-armed submarines.

How Your Personality Can Affect Your Portfolio

Neuroticism and openness, in particular, are closely linked to investors’ willingness to buy stocks

China is launching the first regular Arctic cargo route to Europe, offering faster journeys and lower fuel costs as melting ice and Red Sea risks reshape global shipping.