If advisors can recognize which side of the ledger a client occupies, they can better address the specific behavioral and cognitive biases he may bring to financial decisions.
In our last article, we began drilling down on the four continua of personality that underlie the Myers-Briggs type indicator:
An individual's personality will give us vital guidance to that client's psychological needs, behavioral patterns, and the way in which emotion interacts with the individual's thought processes. Over the next few articles, we will take each of the four continua and individually drill down to provide ways that advisors might recognize which side of the ledger their clients occupy, and also give some ideas and advice as to how advisors can best work with clients and the specific behavioral and cognitive biases they may bring into their financial decision-making.
In previous articles we have given brief descriptions of the extroverted individual juxtaposed with the introverted counterpart, and offered a 10,000-foot view of their communication styles and tendencies toward certain economically irrational thought processes. It's important to remember that even though clients are mostly introverted or extroverted, they are likely to still have traits of the other. So it would not be accurate to pigeonhole individuals into one classification. For instance, levels of comfort or security in specific situations and environments may help to fashion a person into an extrovert in comfortable, family-oriented situations, and an introvert in less-comfortable business meetings or social engagements.
Extroverts are often gregarious, confident, and prone to positive thinking. The extroverted individual would be outgoing and relatively less inhibited in interactions with others.
Following are some brief descriptions of observations common in extroverts that can help an advisor recognize an extroverted personality.
Observations of Extroverts
--Outgoing and friendly in social situations
--Lovers of crowds, upbeat music, and community events
--Maintain large groups of marginal relationships but may have few close relationships
--Driven to sales and leadership positions in career choices
--Derive energy from others
--More likely to engage in delinquent behavior as a child
--Generally self-classify as happy more frequently than introverted personalities
--More prone to react to pleasant events
--Better able to think positively in the midst of negative information or ambiguity
We believe extroverts to be inclined to exhibit active/emotional biases. Following are some behavioral finance biases we think should be expected in extroverted personalities:
Overconfidence Bias: Extroverts' tendency toward self-confidence and need to exhibit this self confidence to manage social and business situations may lead to overconfidence. In situations where extroverts consider themselves to be well informed and socially positioned, they may believe so strongly in their own ability or knowledge that they will refuse to accept the input of others. The reason for their refusal might be the risk of taking a hit to their self-confidence should they be proven wrong.