Narcissistic Personality and Financial Risk Tolerance: An Exploratory Study in Turkey

Introduction

There is a basic assumption in traditional finance: the individual always behaves rationally. The primary purpose of the rational acting individual is to maximize his/her own utility. Yet, in behavioral finance, it is assumed that the individual has got bounded rationality and, as a human being having cognitive and emotional biases that influence his/her decisions (Pompian, 2006). This study focuses on “narcissism bias” that can shape an individual’s decision.

This study examines the relationship between “narcissism” and “financial risk tolerance” which, can be defined as “the maximum amount of uncertainty a decision-maker is willing to acquiesce when making a financial decision” (Grable, 2000). More specifically, the research question to be answered by this study is as follows: “Is there a relationship between narcissistic tendency and financial risk tolerance?”.

A structured questionnaire is developed to measure the influence of narcissistic tendency on financial risk tolerance. The sample consists of university students at the undergraduate level who have been taking finance classes in their student life. The Narcissistic Personality Inventory developed by Ames et al. (2006) is used to measure narcissism tendency. On the other hand, Grable and Lytton’s (1999) financial risk tolerance assessment is used to measure the financial risk tolerance of an individual.

According to Campbell et al. (2004), narcissistic individuals are inclined to overconfidence and risk-taking. Another supporting result is that narcissistic individuals engage in risk-taking behavior more than non-narcissistic individuals (Lakey et al., 2008; Foster et al., 2009). Therefore, at the end of the analysis, similar results are expected.

This is the first study which, connects an individual’s financial risk tolerance with his/her narcissism tendency in the Turkish context. The main contributions of this study are twofold: (1) providing a framework for measuring the link between narcissism and financial risk tolerance; (2) providing evidence about “narcissism bias” from an emerging country.

The remainder of the article is organized as follows: in the second section, the literature on narcissism and financial risk tolerance will be outlined. First of all, the narcissism concept will be discussed. Then, different scales developed for measuring financial risk-taking will be mentioned in the second section. In the third section, the effect of narcissism on financial risk tolerance is examined on a sample of university undergraduate students. The results are summarized in the section that follows the analysis.