Neuroticism, Uncertainty, and Foreign Investment

Abstract

Building on previous research that has established a link between neuroticism and the tendency to avoid uncertainty, and revealed the way foreign securities are perceived by investors, we explore whether variation in the personality trait of neuroticism affects foreign portfolio investment. Contrary to typical studies of personality, we use cross-country observational data, which allows us to analyse the effects of individuals’ decisions, and not merely the possibly biased responses of study participants. Results demonstrate that investors from countries that have a high mean neuroticism score generally invest less in foreign equities than investors from other countries, and that this tendency is also – but to a smaller extent – present when considering investments in foreign debt securities. The paper also contributes to the literature by showing that the individuals from countries with a higher mean level of neuroticism invest less in countries that are culturally dissimilar to the country the investor comes from. An analysis of the variation in the level of global market uncertainty, and the levels of uncertainty in the countries making and receiving the investment shows that neurotics’ reluctance to invest is mostly driven (from a temporal perspective) by the level of uncertainty in their own country.

Keywords: personality traits, culture, portfolio investment, home bias

JEL Classification: G2, G15