Locus of control and investment in risky assets

Nicolas Salamanca Acosta*, Andries de Grip, Didier Fouarge, Raymond Montizaan

*Corresponding author for this work

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Abstract

Internal locus of control is an important personality trait strongly related to many economic outcomes. We show that the probability to own equity and the share of equity in household portfolios increase with people’s internal locus of control. We explore, and find no evidence for, the hypothesis that this relation is driven by a link between internal economic locus of control and subjective expectations about the return and risk of investment in equity. The relation between locus of control and investment in equity also remains after controlling for risk and time preferences, financial literacy, overconfidence, optimism, trust, and other personality traits. We also show that locus of control has a stronger relation with investment in equity for financially illiterate investors. Our results document a strong and robust relation between locus of control and investment behaviour that cannot be explained by leading behavioural investment theories.
Original languageEnglish
Pages (from-to)548-568
Number of pages21
JournalJournal of Economic Behavior & Organization
Volume177
DOIs
Publication statusPublished - Sep 2020

JEL classifications

  • d19 - Household Behavior and Family Economics: Other
  • d14 - Personal Finance
  • g11 - "Portfolio Choice; Investment Decisions"

Keywords

  • financial literacy
  • household portfolios
  • measurement error
  • personality traits
  • risk perception
  • subjective expectation
  • Financial literacy
  • EXTERNAL CONTROL
  • OPTIMISM
  • Household portfolio
  • DETERMINANTS
  • Risk perception
  • SELF-ESTEEM
  • STOCK
  • LIFETIME PORTFOLIO SELECTION
  • CHOICE
  • HUMAN-CAPITAL INVESTMENT
  • Subjective expectation
  • Personality trait
  • PERSONALITY-TRAITS
  • Measurement error
  • CYCLE

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