Grit, Preferences, and Investor Behavior

Abstract

We examine whether grit affects the preferences and trading decisions of individuals. Grit, a non-cognitive personality trait, is malleable and captures the sustained effort toward a goal despite setbacks. Using experiments formalized within prospect theory, we find that grit reduces loss aversion. Gritty investors also exhibit a lower disposition effect, which is consistent with them having lower aversion to losses. Specifically, they are more willing to exit losing investments and accumulate about 7% more wealth relative to control participants. Overall, our results suggest that grit affects the quality of investment decisions. Therefore, interventions cultivating grit could improve households' financial outcomes.

Keywords: Prospect theory, loss aversion, disposition effect, experimental market, personality traits

JEL Classification: G11, G40, G41