How our personality types can influence attitudes towards risks and decision-making (2024)

Our personalities play a role in almost every aspect of our daily lives. Whether it's the type of car we drive, the hobbies we enjoy, or the qualities we look for in personal relationships. It may not come as a surprise that our personalities can also play an important role in investing.

For investors: give yourasset managerhaving an honest evaluation of your attitude to risk and decision making can allow them to incorporate this information into the investment management process.

By creating an Investment Policy Statement (IPS), both the client and the manager can better navigate the journey to achieving the client's desired investment goals. Read on to learn more about an IPS and personality types as they relate to investing.

Assess your personality type

Before you can assess your relationship with investment risk and decision-making, you must look inward. Each person is unique in their own way, but there are definitely trends in personality types. Below are some personality tests you can take for free:

• 16 PersonalTij. The philosophy behind 16Personalities is that there are four broad categories: analysts, diplomats, watchmen and explorers. These 4 categories have 4 subpersonalities that together form the 16 personality types. 16Personalities are often used in workplaces to measure how different people work and succeed. Use it to also understand who you are as an investor.
• Disk. DiSC stands for Dominant, Inspiring, Supportive and Conscientious. The test works by categorizing you into one of the categories. Then you consider yourself to some extent in that category.
• High5-test. This test focuses on your strengths as a unique individual. Instead of grouping yourself into a category with similar traits. The High5 test can help you identify your strengths and areas for improvement.

By better understanding your personality, you can communicate your goals and attitudes more effectively with a wealth manager.

Related reading:How to choose a wealth management company

An introduction to the role of behavioral economics

Behavioral Finance has emerged in recent years as a valuable addition to traditional financial theory.

Traditional financial theory tends to focus on a more scientific approach to decision making. The assumption is that individuals act in a rational manner to achieve the optimal investment result. Behavioral Finance relaxes some of these assumptions. Rather than trying to explain how individuals should act, Behavioral Finance attempts to describe and predict how individuals actually act.

One of Behavioral Finance's most practical contributions to the investment management industry is understanding how our personality types can influence our attitudes toward risk and decision-making.

Care providers try to assign a 'personality type' to their client through a personal interview or a short questionnaire. This can help to better understand the behavioral factors that influence customer goal setting, asset allocation, and risk taking. Consider this information when developing the customer's IPS. He then helps establish the guidelines and processes that determine the relationship between customer and manager. This allows the advisor to better manage the client's expectations and behavior.

Related reading:Fiduciary duty: what it is and what it means for your portfolio

Insight into the different types of investors

Below you will find descriptions of the most common investor personality types. In addition, it explains how an IPS can deal with the unique circ*mstances that each of them can present.

Methodical investors

As the name suggests, methodical investors tend to follow a conservative investment philosophy. They take a thoughtful, strategic approach to decision-making, which tends to rely on observable “hard facts.”

These types of investors don't often get emotional about money or their investments. They will prefer an established process, especially one that includes rigorous analysis and research.

Methodical investors will find comfort in following an IPS. This is because it outlines what types of investments are and are not allowed as part of their portfolio. In addition, a mutually agreed benchmark is established in advance that can be used to evaluate the portfolio manager's performance.

Cautious investors

Prudent investors have the characteristic of having a below-average risk tolerance compared to other investors with similar circ*mstances.

Sometimes this is because they have accumulated their wealth by receiving gifts, inheritances or by earning high compensation through work.

None of the above circ*mstances required them to risk their capital. For this reason, these clients may have less awareness or knowledge of the relationship between risk and return in the capital markets.

But for this type of investor, an overly skeptical view of risk can sometimes lead to missing out on profitable investment opportunities.

In this respect, an IPS can be valuable to the customer. It outlines in advance the degree of risk that the investor is and is not comfortable with.

By clearly establishing these expectations at the start of the client-manager relationship, the client can trust that their asset manager will be guided by IPS. Furthermore, they are obliged to remain within the framework of pre-agreed boundaries.

At the same time, a carefully designed IPS can also be beneficialasset manager. It is a tool that can be used to help them guide a client through a difficult market environment. Remind them that risk is a necessary element of investing and that the client has agreed to accept a certain degree of volatility.

Related reading:Asset management Meaning: The relationship with your asset manager

Individualistic investors

Individualistic investors tend to be confident. They are not averse to expressing their own opinions when it comes to making investment decisions.

Sometimes these individualists come to their own independent or "contradictory" conclusions regarding a particular investment. Often the conclusion is based on third-party research, such as an article they read or something they saw on television.

If the client indicates that they want to influence the asset management process, an IPS can be valuable in determining from the outset how the client and the manager want to work together.

Having a clear understanding from the start of the process that will be followed, along with the expectations of both parties, can go a long way in resolving any disputes, especially if things don't end up going quite as planned.

Spontaneous investors

Spontaneous investors have previously posed a challenge to some asset managers in some cases due to their overactive nature.

This is partly because spontaneous investors are on average more emotional and as a result often update their outlook for the market and their various investments in response to the latest news or market development.

One of the problems this behavior can cause for advisors is that the reactionary nature of their clients often leads them to over-manage the account, which often leads to higher fees and commissions, excessive account churn, and below-average returns.

An IPS can be useful to both the client and the advisor in these cases, by initially establishing the level of control that the client delegates to the manager.

In addition, establishing an IPS can also provide the advisor with a valuable opportunity to educate his or her client about the explicit and implicit costs associated with excessive trading activity.

Related reading:Asset management versus asset management: what's the difference?

Final thoughts

An assessment of the client's personality type can not only be useful in helping the asset manager develop a specific and meaningful IPS, but can also be valuable in helping the client gain greater awareness of his own views on risks and decisions. manufacture.

The result should be better two-way communication between client and manager and more honest, informed and open conversations around the topic of risk.

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Read more:Behavioral Finance: The biases that influence investment decision making