Connecting Personality and Finance to Better Understand Clients
Understanding consumer behavior is a key challenge organizations in all industries face. Today, business decisions and strategies are often executed based on scattered data points and the supposed connections between them. Thus, organizations are excluding one of the main driving factors of consumer behavior altogether: individual personality traits.
The Sliding Scale of Personality Traits
Personality traits are a fascinating aspect of people, and as consumer psychologist John C. Mowen has pointed out, they explain the fundamental roots of consumer financial behaviors, e.g. how likely a person might be to impulsively spend a large amount of money or save up for retirement. One of the most common tools of assessing personality traits is the Five Factor Model of Personality. It’s a well-established reference point in trait psychology focusing on the following personality traits: openness, conscientiousness, extraversion, agreeableness, and neuroticism. However, these traits are extremely difficult to identify in a straightforward way because they’re all part of a range, a spectrum. Each individual exhibits each trait in different proportions.
Pinpointing where each person falls on each trait’s spectrum and comprehensively understanding how these five spectrums are correlated is crucial for any company that wants to understand its customers better. Yet most companies are unable to crack the personality code in any productive, scalable way.
How Personality Traits and Financial Behavior are Correlated
Basing loan approval on a credit score or insurance premiums on an individual’s claim history is how many businesses try to overcome this challenge. However, those figures may not portray who the individuals behind the numbers really are, which is what actually affects how they will act in the future. These data points also lead businesses to automatically exclude anyone who doesn’t have a credit or claim history.
If businesses incorporated trait analysis into their operations, they would not only understand the person behind the data and be able to accurately predict consumer behavior, but they could also open their doors to previously untapped or underserved client bases. Plus, these traits are essentially constant in individuals, meaning that by using the right tools, such as advanced machine learning algorithms like EmpathAI’s, one can predict what their behaviors will likely be over time. The implications of this are significant.
There are countless studies that show the correlation between different personal traits and financial behavior. At Motiv8AI, we have examined the results of thousands of such studies and used some of the results to take our inhouse research further. The results of such studies are good sign posts, but they are by no means “the bible” of the field. The results reflect tendencies that are relative, rather than strict categories. They exist on a continuum, and in most individuals multiple personality traits co-exist, creating complexity and richness. Please bear these in mind as you read the findings below.
Case Studies: Impact of Personality Traits on Financial Behavior
According to a study by Mayfield, Perdue, and Wooten (2008), college students who score highly on the openness spectrum are more likely to engage in long-term saving and investing. Similarly Hershey and Mowen found that highly conscientious consumers tend to save for retirement effectively and avoid compulsive purchases. These are characteristics that are highly sought after by finance and insurance companies, and being able to identify them upfront could help enhance a company’s understanding about potential customers. This deeper understanding could also open the door to new opportunities for those consumers.
In terms of loans, agreeable individuals are less likely to default by 0.23%, and people who register on the higher end of the emotional stability spectrum are 5% less likely to default, according to this study. This contrasts with highly conscientious individuals who, as concluded by Donnelly, Iyer, and Howell (2012), are more likely to avoid debt in general due to greater levels of financial self-control. The ability to make connections between psychological traits and these financial behaviors can help businesses reduce default risk and focus resources on the best suited customer segments for their products.
When it comes to risky financial behaviors, some studies have found that highly extraverted individuals tend to be more risk-tolerant and pursue high risk/high reward investments. Jawara (2017) states that this is also true for business owners and entrepreneurs who have a high degree of openness — the willingness to take greater risks often results in greater business success. Consumers on the low end of the extraversion spectrum, on the other hand, usually don’t take on unnecessary debt and avoid relying on credit, whether it be credit cards or bank overdrafts, according to a study by Brown and Taylor.
The value of identifying and reacting appropriately to these traits is game-changing and can have a massive positive financial impact on organizations in any industry. That said, the psychological landscape is complex and one must be able to incorporate this complexity into a model.
Accurately Predict Financial Behavior Through Trait Analysis
Realizing the importance of including consumers’ psychological traits in business decisions is a key step to ensuring sustainable business growth. Incorporating trait analysis into operations is where organizations will actually start to experience this growth. But most businesses lack the time, resources, and expertise to effectively do this.
This is where EmpathAI provides immense value. Researched and developed over five years by an in-house team of leading psychologists and AI experts, EmpathAI creates multidimensional consumer appraisals in near real-time that empower businesses to make informed decisions and build productive client relationships. Its ability to predict financial behaviors can lead to double-digit growth for businesses in industries ranging from finance and insurance to ecommerce and HR, as well as promote financial inclusion for underserved households and businesses. Powered by artificial intelligence, EmpathAI complies with all privacy regulations and helps businesses get to know their customers at scale.
