The Making of a Trader: A Grounded Theory of Investor Identity Formation

Abstract

Behavioral finance research has extensively examined investment decision-making and investor biases; however, limited attention has been devoted to understanding how individuals develop enduring investor identities. This study aims to develop a substantive theory explaining the process through which investor identities emerge through the interaction of financial knowledge and locus of control. Adopting a constructivist grounded theory approach, data were collected through in-depth interviews with 22 active individual investors selected through purposive and theoretical sampling. Data analysis followed the constant comparative method involving initial coding, focused coding, and theoretical integration. The findings reveal that investor identity formation is a progressive and iterative process consisting of five interconnected stages: exposure and curiosity, knowledge acquisition, outcome interpretation, behavioral adaptation, and identity consolidation. Financial knowledge functions as a cognitive resource that enhances investors' capacity to evaluate information and reflect on experiences, whereas locus of control operates as an interpretive mechanism through which investment outcomes are assigned meaning. Through repeated cycles of learning and adaptation, investors develop relatively stable identities, including risk-averse, explorer, trader, and contrarian orientations. The study proposes the Investor Identity Formation Framework (IIFF), extending behavioral finance literature by shifting attention from investment decisions to the developmental processes through which investors become distinct market participants

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