Understanding personality will help you understand your clients.
We now turn our attention to one of the fundamental roots of behavioral economics by taking a more detailed look at the psychological underpinnings of our human nature.
Psychology systematically explores human behavior, motivation, cognition, emotion, and well being. Thus, psychology teaches us about important ways in which human decision-making differs from the rational assumptions of traditional economic models.
In previous articles, we have talked extensively about departures from economic rationality, their potential causes, and some of the outcomes that result from these departures. Most of our examples of departures from the rational models of economics have been cognitive departures or departures that result from errors in thinking processes. These cognitive distortions are far easier to counteract than departures that result from emotional or personality-based biases. Therefore, we have started with examples that are somewhat easier to explain and understand.
Now, we proceed to explain and help you understand how a client's personality type impacts how they think, how they feel, and ultimately how they make financial decisions. We will now take a couple of articles to discuss personality traits--how they are developed, how they function, and how they malfunction.
What Is Personality?
Webster defines personality as, "The combination of characteristics or qualities that form an individual's distinctive character."
Simply put, personality is the fundamental template through which an individual experiences the world. It is an orientation toward others, toward oneself, and toward one's life. It is a consistent and pervasive set of traits, assumptions, and frames through which one organizes and perceives.
The manifestations of personality are numerous. For example, is one likely to fight or to run away when confronted by a bully? Is one outgoing or introverted? Is she a risk taker or not? Does one trust easily or is one guarded?
Personality impacts the way we approach change or choose to take on challenges. Personality is relatively enduring; while traits and behaviors change, personality stays with us. It is our nature, our temperament. In many ways, personality informs the "essence" of who we are.