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The Conscientious Investor

by Lisa Brenneman

A behavioural finance and innovation strategy expert explains the key findings of TD’s latest study on wealth personalities.

IN THE LATE 1970s, a research team out of Maryland’s National Institutes of Health released the Five Factor Model of personality, theorizing that most human character traits can be described using five dimensions: Agreeableness, Conscientiousness, Neuroticism, Openness, and Extraversion. Nearly 50 years later, tests that assess these ‘Big Five’ personality traits are considered reliable and are widely used by psychologists around the world. 

More recent research indicates that of the Big Five traits, Conscientiousness may be the best predictor of success. In a variety of studies, people who test high in Conscientiousness have higher incomes and job satisfaction, and research indicates that this trait is an important factor for finding and retaining employment. The benefits extend beyond the workplace: Highly conscientious people commit fewer crimes, have fewer strokes, lower blood pressure and a lower incidence of Alzheimer’s disease.

Among their habits, conscientious people tend to be highly organized, self-disciplined, and plan ahead. They have also been shown to be good at setting and working towards goals and to be persistent amid setbacks. Taken together, the evidence indicates that conscientious people have what it takes when it comes to setting and meeting personal financial goals. And it turns out, women might have an edge on men in this regard.

In our TD Wealth Behavioural Finance Industry Report Exploring Wealth Personality, we showed that, on average, Canadian women are significantly more conscientious than men: 46 per cent tested high on this important factor, versus 39 per cent of men. Nevertheless, women lack financial confidence: only 31 per cent consider themselves to be ‘financially knowledgeable’.

I myself once personified this paradox. When I first joined TD ten years ago from the consumer packaged goods industry, I was asked about my thoughts on the issue of women and investing. My answer: “I’m smart and I have a successful career, but I just don’t prioritize learning more about finance. I feel embarrassed to ask my advisor for help because I feel like I should know about this already.” I anticipate that many women feel the same.

The fact of the matter is this: 90 per cent of women will play the role of sole financial decision maker at some point in their lives, but many lack the confidence to fully embrace the role. Fortunately, the news isn’t all glum: 92 per cent of women want to learn more about financial planning and 83 per cent want to get more involved in their finances.

If the research shows that women have the inherent personality required to successfully manage their financial planning, then why are we less likely than men to have the confidence to do so?

It may have something to do with the fact that in our study, women also scored higher than men on the Agreeableness dimension of the Five Factor Model: 31 per cent scored high versus 16 per cent of men. On average, women value social harmony more so than ‘stirring the pot’ by asking questions. This desire to not ‘rock the boat’ may lead to making decisions without feeling totally comfortable about them.

According to our research, women lag behind not only in financial confidence and also in actual financial literacy. Only 10 per cent of women in our study stated that they were ‘extremely knowledgeable’ about finance, trailing men at 18 per cent. Additionally and not surprisingly, as the conscientiousness scores of women increased, so did their confidence in their overall financial knowledge.

In addition, our study demonstrated that single women behave differently than women who are married with children. For instance, a woman married with kids was 28 per cent less financially confident than a single woman without kids. What’s more, married men with kids have more than double the financial confidence of their female counterparts. Following is a summary of our key findings, organized by gender.

90 per cent of women will be required to play the role of sole financial decision maker at some point in their lives.

Women: Self-Disciplined and Amenable

A larger proportion of the women we surveyed were self-disciplined and longer-term in their thinking (46%, versus 39% for men), which are traits associated with goal-related planning. This forward-looking focus suggests that women may be more dedicated to a vision for retirement.

The tendency of women to prioritize long-term security may be evident in the financial dissatisfaction reported by women with children. While parents — irrespective of their gender — reported greater dissatisfaction with their retirement readiness (likely stemming from the high costs of parenthood), women with children reported more intense levels of dissatisfaction than fathers: Only 18 per cent said they were ‘very satisfied’ with their retirement readiness, compared to 26 per cent of men with children.

A propensity for self-discipline may also suggest that women are better at saving and other activities that require a steady commitment, such as regularly reviewing financial plans and meeting savings milestones. Dedication to a long-term goal, however, does not translate into a focus on everyday details. Women were slightly less likely to ‘look closely at each investment on their statement’ (36%, versus 42% for men), which suggests that they may be more interested in big-picture planning than how individual securities may be doing in the short term.

A lower percentage of women tested high on the financial literacy questions on our survey: 16 per cent answered all five questions correctly, versus 26 per cent of men. They also reported having more confidence in the abilities of their wealth manager (62% for women, 53% for men). The trust that women place in the judgment of professional advisors may be a reflection of the more amenable personality traits that they exhibit: 31% scored high on Agreeableness, versus 14 per cent for men.

An emphasis on self-discipline and a willingness to follow professional advice bode well for long-term planning. However, a larger percentage of the women we surveyed, when compared to men, reported a low tolerance for initial market declines: 15 per cent expressed nervousness at the first sign of a decline, versus six per cent for men.

Men: Questioning and Calm Under Pressure

A greater proportion of the men we surveyed reported personality traits consistent with being ‘in the moment’ (25%, versus 18% for women). As such, men may be more likely to focus on short-term risks and rewards and could be more willing to compromise their long-term plans in order to do what seems to make sense at the time. While men seemed less interested in long-term planning, they were also more interested in how their individual investments were doing in the short term. Male respondents reported a greater tendency to ‘closely review each individual investment on their statements’ (42%, versus 36% for women), which suggests a focus on current conditions.

We also found that men are more likely to be calm under pressure: 45% rated low on ‘reactiveness’, versus 35 per cent for women. Men were 60 per cent less likely to express nervousness at the first sign of an investment loss than women, and therefore might be less likely to react hastily to market events. The ability to withstand initial market turbulence may be attributable in part to a greater sense of financial self-confidence: As indicated earlier, 18 per cent of men believed that they were ‘extremely knowledgeable’ about financial matters, compared to 10 per cent of women. 

A larger number of men in our study were found to be questioning and skeptical. Overall, 52 per cent scored low on Agreeableness, versus 31 per cent for women. Men, as a result, may be less inclined to express confidence in their advisors’ abilities. Indeed, 53 per cent reported high levels of confidence in their advisor versus 62 per cent for women. This questioning nature may have an impact on the strength of the advisory relationship. Men who were more skeptical also reported weaker relationships with their wealth managers.

A cautionary note: Our team posited that while men may benefit from their tendency to remain calmer under pressure, this trait may be offset in some cases by higher potential for overconfidence, and a greater tendency to deviate from a financial plan.


The Big Five Personality Traits

High conscientiousness is characterized by short-term sacrifice in pursuit of long-term goals. Low conscientiousness is associated with short-term compromise.

High agreeableness suggests a more trusting and cooperative personality. Low agreeableness suggests a more inquisitive and challenging personality.

High neuroticism suggests a tendency to respond to emotional stress. Low neuroticism is characterized by calmness and emotional stability.

High extraversion is characterized by an outgoing nature and the tendency to seek attention. Low extraversion is indicative of a more reserved, reflective personality.

High openness indicates a willingness to experiment in pursuit of ideals or higher ambitions. Low openness is indicative of a safer, more pragmatic personality. 

Avoiding Blind Spots

Regardless of gender, even the most confident and savvy investor has blind spots. Following are a few of the most common ones we observe in our work with clients.

THE FRAMING EFFECT. This is the tendency to respond to the same problem differently, depending on how it is presented to you. For instance, you may view a 10 per cent loss on a $1 million portfolio differently than a $100,000 loss, even though they are equivalent.

FAMILIARITY. This is the common tendency to over-invest in what you are familiar with. For example, you may have a tendency to invest more heavily in companies or industries you know (i.e. where you work). This can lead to an over-concentration in a specific sector.

SENSITIVITY TO NOISE. ‘Noise’ is recent information that can tempt you to second guess your established investment strategies. You may be tempted to make reactionary changes to your portfolio at inopportune times based on noise in the media. The problem is, decisions based on noise can negatively impact your portfolio.

LOSS AVERSION. This is the pervasive human tendency to feel losses more strongly than gains. For instance, if your portfolio lost 10% in value, this is likely to generate a stronger emotional response than a 10% gain in value.

SHORT-TERM FOCUS. This is the tendency to value a reward that arrives sooner and discount a reward that arrives later. For instance, you may have a hard time visualizing retirement income and expenses or have difficulty saving for a future goal.

OVERCONFIDENCE. This is the tendency to overestimate our own investing ability (along with many other things in life). This might mean you engage in higher trading activity than the average person, which has been shown to lead to lower returns.

In closing

As indicated herein, we all have things to work on with respect to our investing personality. Understanding your own inherent advantages and challenges and being aware of common biases is the first step towards greater financial confidence — and a winning portfolio.   

Lisa Brenneman is the Behavioural Finance & Innovation Strategy Lead at TD Wealth and co-author of Exploring Wealth Personality: A TD Wealth Behavioural Finance Industry Report. Citations for all studies quoted in this article appear in the report, which is available online.

This article appeared in the Spring 2020 issue. Published by the University of Toronto’s Rotman School of Management, Rotman Management explores themes of interest to leaders, innovators and entrepreneurs.

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