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.
Illusion of Control Bias: This bias may play into the extrovert's love of crowds and community events. They are more prone to being swept into the joy of the masses. They will derive energy from the crowd. Extroverts' self-confidence and illusion of controlling the situation are a large part of what allow them to be comfortable in crowds when introverts would be made nervous by their perceived lack of control.
Bandwagon Bias: Extroverts have a need for social interaction and thrive in social environments. For this reason we believe it more likely for them to exhibit a bias toward the social crowd, making them more prone to crowd behavior. They probably can't help but chat up their office mates or cocktail buddies about their market performance. When they hear the consensus of the crowd, they may follow in order to avoid upsetting the social order.
More introverted individuals can be shy, inhibited, and have tendencies toward self-doubt and reliance on others.
Observations of Introverts
--Self-conscious, often wondering whether they fit in or are doing things right
--Close to the vest
--More focused and able to maintain focus in social situations and over longer periods of time
--Shy in new or uncertain situations
--Tend toward private reflection instead of public discussion in decision-making processes
--Take their time to think deeply and reflect internally; you say they think before they act
--Get their energy from within rather than feeding off of others like an extrovert will; they may even find groups of people to be emotionally and physically draining
--They enjoy alone time and need it to refuel after stressful or nerve-wracking social encounters
--Some studies suggest introverted personalities are strongly correlated with "gifted" intellect
--Careers such as academics and computer programming
--More prone to react to negativity and see ambiguity as negative
We believe introverts may be more inclined to exhibit passive biases. Following are some behavioral finance biases we believe to be common in introverted personalities:
Aversion to Ambiguity: Introverts are prone to negative reactions in the midst of ambiguity, and this negative reaction can often lead to a barrier in financial decision-making known as the Aversion to Ambiguity. They may see the presence of ambiguity as a negative and avoid any decision or decision-making problem that requires them to recognize its presence.
Status Quo Bias: Because introverts tend to be more inward looking and feeling, they may prefer the status quo over possible change. It may be hard for them to convince themselves that they have the strength necessary to survive the changes.
Decision Fatigue: Introverts need to have inward reflection time and alone time. They are unlikely to be easily engaged in large strategy meetings and may need to take long conversations in chunks in order to be sure they have the time to internalize the issues and process the decision problem.
Next month we will have a more in-depth discussion and application of the Sensing vs. Intuition leg of the Myers-Briggs continua.