Grit, Loss Aversion, and Investor Behavior
53 Pages Posted: 16 Jun 2021
Date Written: June 14, 2021
We examine whether grit affects individuals' preferences and trading decisions. Grit is the sustained effort toward a goal despite setbacks. It is malleable and distinct from the Big Five personality traits. Using experiments formalized in prospect theory, we find that grit reduces loss aversion. By diminishing loss aversion, gritty investors exhibit a lower disposition effect since they are more willing to exit losing investments. Consequently, they accumulate about 7% more wealth relative to control participants. Overall, grit affects the quality of investment decisions. Ultimately, our results suggest that interventions cultivating grit could improve households' financial outcomes.
Keywords: Prospect theory, investor preferences, disposition effect, experimental market, personality traits
JEL Classification: G11, G40, G41
Suggested Citation: Suggested Citation