The psychology of investing
Every financial advisor will have a few stories to tell about irrational investors, who against the best advice and the most logical facts and figures, bought or sold shares or changed their investment strategy, only to suffer losses.
Human beings are unique. This poses some serious challenges for financial advisors in an investment world where everything is neatly categorised. It would be far easier to create suitable financial planning for different people who have different attitudes to risk and different thresholds for financial stress, if the advisor could understand how a client perceives money, investments and risk.
Risk perception
"Each investor has his own subjective reality and perception of risk, which prevents him from buying into objective definitions of risk," says Dr Kathleen Gurney of the Financial Psychology Corporation, who designed the Moneymax Money Personality Assessment. "This subjective experience of risk is the reason why two different investors can look at the same market, and one will see a stock buyer's dream and the other will perceive it to be a nightmare. The fact of the matter is that the way we perceive risk is subjective, emotional and influenced by the ability to handle uncertainty."
Personality traits provide clues
Investors' internal or psychological risk profile ultimately predicts their reactions to and perceptions of their investments and the satisfaction they get from them. The client's Financial Personality is revealed by certain personality traits and can be determined by answering the quick Moneymax Money Personality Assessment.
* Involvement - the extent to which your clients want to be personally involved and responsible for managing their money.
* Pride - the personal satisfaction your clients derived from the management of money in the past.
* Emotionality – the degree of emotion involved when your clients deal with money.
* Altruism - the degree to which your clients believe in the generosity of others.
* Risk-taking - the level of comfort your clients experience when taking financial risks.
* Confidence - the degree of anxiety your clients experience when financial decisions are made.
* Power - the degree by which your clients' desire for power influences their behaviour.
* Work ethic - your clients' opinions on how their work ethic relates to their financial success.
* Contentment - the degree of personal happiness your clients derive from their money.
* Self-determination - the degree to which your clients feel in command of their financial journey.
* Spending - your clients' attitudes towards spending and saving money.
* Reflectivity - the way your clients reflect on past financial decisions when making decisions.
* Trust - the level of honesty your clients think people have when handling money.
Gurney found that these 13 traits define nine money personality types.
The nine financial personalities
There are nine different financial personalities, each with its own set of dominant traits when dealing with money and tolerating risk. In the next few editions we will take a look at each personality type and the type of investment strategies that suit them best.
Knowing your client's financial personality type will help you avoid making investments that will leave your client in a cold sweat, or at least help you to understand why they are reacting that way.
