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How Is a Money Personality Developed?

Understanding personality will help you understand your clients.

Justin A. Reckers and Robert A. Simon, 02/16/2012

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.

How Is Personality Developed?
Every personality is unique and makes even identical twins different from each other, despite having identical genetics. Personality is the result of genetics, experience, temperament, predisposition, values, morality, and sociology.

Over the years, many personality tests have been developed. The most widely used of these tests, and the most widely researched, is the The Minnesota Multiphasic Personality Inventory (MMPI). This test results in a psychometrically derived personality profile that is unique to each individual. Other tests, such as the Myers-Briggs Type Indicator (MBTI), yield results that depict the "type" of personality someone is.

The MMPI is mostly used by mental health practitioners and yields unique descriptions of individuals by measuring a wide variety of traits and, by relating these traits to one another, paints a picture of that individual's unique personality. The MMPI is typically used by psychologists in clinical or forensic settings.

The Myers-Briggs Type Indicator suggests that there are as many as 16 possible personality types. This test is commonly used in the workplace to assist in determining how people will relate to one another and to assist in assessing if one is temperamentally suited to a certain job or a certain team.

Personality testing underlies all of the reality shows on television. Yes, they do cast people with conflicting personalities in order to create drama. You can also find psychometrics as a regular part of a clinical psychologist's repertoire working with patients.

The bottom line is that we all have many different traits in our personality created by heredity, experience, and sociology. These traits working together can create a type. The problem lies in trying to create descriptions that actually characterize the humans they are meant to describe.

Beyond Tests and Types
Many of the big box financial advisory firms, insurance companies, and brokerage businesses have developed their own "personality tests" and "personality types" in recent years. They use this information to assist in understanding clients, so as to tailor investment portfolios that match clients' financial personality and objectives.

Tests that help assess traits and types can be valuable assessment tools in a financial advisory practice if they are used and interpreted by a qualified professional in the right context. Keep in mind that tests such as the MMPI and Myers-Briggs are tools and are not determinative in and of themselves. Further, such tests are probably most easily used for big box client assessments, where clients fill them out alone at their desk. Tests are not a replacement for a real client relationship, and gaining your own sense of who the client is and what the client needs and can accept.

A better way to determine a client's personality traits and types is to have discussions with them. Ask yourself questions such as:

--How has the client's tolerance of risk and general attitude toward money changed recently?

--What kind of career has the client undertaken? Is it risky and competitive, or safe and comfortable?

--Is money a topic of disagreement in their marriage? Was it in their parent's marriage?

--Has the client risked his own capital in pursuit of greater wealth?

--Is the client willing to make lifestyle changes in pursuit of her goals?

Getting to know our clients better should naturally lead us to think about behavior, personality, and emotion every day in our financial advisory practices. Our articles in coming months will continue discussing personality, including some ways you can use personality traits to help build deeper relationships with clients, help them better understand themselves, and encourage economically rational decision-making for all.

Justin A. Reckers, CFP®, CDFA™, AIF® is Director of Financial Planning at Pacific Wealth Management® and Managing Director of Pacific Divorce Management, LLC based in San Diego, CA. www.pacwealth.com, www.pacdivorce.com

Robert A. Simon, Ph.D. is a forensic psychologist, trial consultant, expert witness and alternative dispute resolution specialist based in Del Mar, CA. www.dr-simon.com

Justin A. Reckers, CFP, CDFA, AIF is director of financial planning at Pacific Wealth Management www.pacwealth.com and managing director of Pacific Divorce Management, LLC www.pacdivorce.com, in San Diego.

Robert A. Simon, Ph.D. www.dr-simon.com is a forensic psychologist, trial consultant, expert witness, and alternative dispute resolution specialist based in Del Mar, Calif.

The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.
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