Personality Type Theories and Investing

This month's article is the fifth in a series called "Building Better Client Relationships by Understanding Investor Types." This series is intended to help advisors create great working relationships with their clients by taking a step back and understanding the type of person they are dealing with (from a financial perspective).

Individuals are different in the way they process information, vary in the way they behave when faced with a financial decision, and have different risk preferences, so it is essential that advisors interact with each client effectively. This often means that you must change the way you speak to different types of clients even though your advice may be similar across your client base.

Some advisors fail in their tasks not because they don't have technical knowledge of the markets, understand the strategies of investment managers, or have systems that can deliver the best methods of portfolio construction, but rather because they don't understand what is truly important to the client and how to communicate and interact in a way that is meaningful and effective.

As you know by now, I have dedicated a substantial amount of time promoting the benefits of behavioral finance research and making it accessible to large numbers of financial advisors. In my latest book, "Behavioral Finance and Investor Types," my primary objective was to simplify the practical application of behavioral finance by boiling down many of the complexities involved in diagnosing and treating behavioral biases into the simple concept of investor types, which I refer to as "behavioral investor types" or BITs. BITs are defined in large measure by the biases themselves and are categorized in a way that makes intuitive sense and can be easily understood.

In the last article, we defined belief perseverance biases and information processing biases, and we will now move to personality type theories. Although there are many different theories of personality, it is important to understand exactly what is meant by the term. Personality is made up of the characteristic patterns of thoughts, feelings, and behaviors that make a person unique. It arises from within the individual and remains fairly consistent throughout life.

To gain an appreciation for the foundation of the concept of a behavioral investor type, it is essential that we take some time to explore how personality types were developed. In this article, we will discuss some existing personality identification schemes, which will help put into perspective the behavioral investor type framework I will discuss in subsequent articles.

This article is intended to bridge the gap between mainstream personality theories and introduce the theory behind "financial personality types" or behavioral investor types, which combines elements of a number of personality theories. BITs are most strongly influenced by the Type Theories and are a classification scheme similar to Hippocrates' four original types, the Kiersey Types, and the Myers-Briggs Types.

Type Theories
Type theories take us all the way back to Ancient Greece, around 400 BC, to the work of Hippocrates. The great physician believed that people could be "typed" into four distinct categories named Melancholic, Sanguine, Choleric, and Phlegmatic, after the various bodily fluids that were then thought to influence personality. Each category was also linked to one of the four elements: fire, air, water, and earth, collectively referred to as the "humors." Today, Hippocrates' personality types are called: Guardians, Artisans, Idealists, and Rationalists.