How Does Loss Aversion Mediate the Relationship between Personality Traits and Investment Decision-Making?

Abstract

This research finds evidence of the mediating role of loss aversion in the relationship between personality traits and investment decision-making among individual investors of the Colombo Stock Exchange. In Behavioural Finance expected utility maximization is replaced by the Prospect Theory, and it emerges as a fundamental descriptive theory for the study, attempting to uncover the subtle interplay between big five personality traits— conscientiousness, extraversion, agreeableness, neuroticism, and openness to experience— - and investment decision making. The study employed a quantitative research approach utilizing a convenience sampling technique, with 351 individual investors contributing to the research. Data collection was carried out through a structured questionnaire. The study adopts a cross-sectional time horizon, and Structural Equation Modelling was used to analyze the data with the help of SmartPLS4 statistical software. The study identified significant relationships between personality traits and investment decision-making. Specifically, openness to experience and agreeableness were positively associated with investment decision-making, while extraversion, openness to experience, and conscientiousness were significantly related to loss aversion. Mediating analysis revealed that loss aversion fully mediates the relationship between extraversion and conscientiousness with investment decision-making, and partially mediates the relationship between openness to experience and investment decision-making. The study’s findings highlight that considering personality traits in investment decision-making can help financial practitioners in Sri Lanka and similar economies tailor investment strategies, improve investor education