Economists Get It: Personality Predicts Performance

Provided by Guest Blogger, Allison Howell

The financial costs of personnel decisions are well documented. For each poor hiring decision, companies can lose, on average, $25,000-$50,000 – even more if you take into account lost productivity, employee morale, and client relationships. Less well understood, however, is the economic impact of personality differences among good hires.

A newly published working paper by the National Bureau of Economic Research sheds some new light on the topic. This research shows significant links between the personality of CEOs and the financial outcomes of their businesses.

The study authors, from Harvard, Stanford and the University of Chicago, used linguistic analysis, a systematic mapping of words and speaking styles, to identify scores for the Big Five personality traits for over 4500 CEOs.

The Big Five is arguably the most widely accepted taxonomy of personality traits among psychologists; it categorizes personality into degrees of agreeableness, conscientiousness, extraversion, neuroticism, and openness to experience. The linguistic analysis used in this particular study has been established as a reliable method of predicting personality.

As an example, a CEO who is high on the agreeableness scale would display speech patterns that include use of adjectives such as appreciative, considerate, gentle, and trustful. The analysis also looked at the number of words spoken, the presence of qualifiers, and other parts of speech—adverbs and conjunctions.

After the language was mapped to the personality traits, the authors examined the associations between personality traits and the CEOs’ investment and financial choices, and then looked at the connection with the overall performance of the CEOs’ firms.

In terms of the investment and financial choices, this study shows that higher levels of openness are associated with higher R&D intensity, a measure of a company’s spending toward activities aimed at expanding the sector and product knowledge. Openness was also negatively correlated with net leverage, a measure of the company’s debt load. In other words, the more open the CEO, the higher the spending on R&D activities and the lower the net leverage of the company.

Higher degrees of conscientiousness, which refers to a leader’s self-discipline, willingness to follow rules, and cautiousness, were associated with lower levels of growth. In addition, companies led by more extraverted CEOs showed lower returns on assets and lower cash flow.

Although this study warrants replication, the biggest take away is that personality does indeed influence performance – in concrete and measurable ways. Moreover, at the CEO and executive level, personality can affect the overall health of a company. In other words, personality predicts performance.