Every investor is different, with different financial goals, different tolerances to
risk, different personal situations and different desires. From the point of view of
investment management, these characteristics are often defined more rigorously as objectives and
constraints. Objectives being the type of return being sought, while constraints include
factors such as time horizon, how liquid the investor is, any personal tax situation and
how risk is handled.
Nevertheless, it's really a balancing act between risk and return, with each investor having unique
requirements, as well as a unique financial outlook. What must remain constant throughout,
however, is the delivery of an investment program that is not only specific to an
investor's personal needs but that also works well and provides financial security for the
future. Within these constraints too, there should also be the opportunity to have some
fun with investments if clients should so wish. For example, by, say, using a small
proportion of available funds for dealing in more speculative investments such as
technology companies or emerging market stocks.
To this end psychologists have become increasingly involved during recent years in
attempting to classify, or provide some sort of typography of, different sorts of
investor. The assumption is that investors, in one form or another, represent just a
handful of types, and that then matching the investor to the investment will lead to better returns.
Besides being useful for clients, investor typographies have benefits for the
professional as well. Many discount brokers make money on the high turnover of dealing.
But as bull markets turn into bear markets, investors may shy away, leaving a hole in
brokerage commission. Any method that gives brokers a marketing edge, under these
conditions, is useful. Additionally, quality brokerage houses would love to have this
information available as it gives them a way of targeting clients with a range of
financial products more effectively - including insurance, saving schemes, mutual funds,
and so forth. Overall, many responsible brokerage houses realize that if they provide an
effective service that is tailored to individual needs, in the long-term there is
far more chance they'll keep their clients through the bad market times as well as the
Yet, though it may be true that investors can be categorized according to a limited
number of types, it has also led to much of the same ground being covered in the
professional and popular literature on the subject; which is to say, most systems embody
similar types but the names are different. In one source an investor may be classed as 'A
"Stay At Home" Investor, while in another an investor may be referred to as an
'Inertia Riddled Investor'. Similarly, there may be no difference between a 'Careful
Investor' and a 'Cautious Investor'. On the other hand, there may be some difference
depending on what the researcher had in mind. We haven't yet reached a stage where there
is consensus about what different types should be called or indeed what the types should
mean in terms of their specific constellation of characteristics.
Another difficulty is that as the fashion in behavioral finance and investment
psychology gains momentum and catches the public's imagination, books appear structured
according to several types and a chapter is written outlining how such an investor behaves
- in other words, the book is structured round a typography; and the typography is assumed to be correct and reflective of how different investors behave, which it may not be. One of the better examples, however, is in John Schott's Mind Over Money, where investors are profiled as: The
"I Can't Stop Worrying Investor", The Power Investor, The Inheritor, The
Impulsive Investor, The Gambler, "The Make Me Safe Investor", and The Confident
Investor. In sum, what this boils down to is that these forms of classification system, even at their best, are still very much in their infancy. But, while they may still suffer from the problem of their meaning being similar to other
typographies, as well as of greatly oversimplifying the different investor behaviors, the more carefully produced ones
do draw to some extent on theories of personality already in the psychological
profession's armory, and can therefore be helpful for increasing investor awareness.
Research, however, has gone further than what may be seen in popular books or
Cosmo-type magazine articles. Below are several classification systems that bear greater
scrutiny. Further information about the first two, by the way, can be found in: Individual Investors, Ronald W
Kaiser, Chapter 3 in Managing Investment Portfolios: A Dynamic Process, John L Magnin and
Donald L Tuttle (eds), Warren, Gorham & Lamont (1983; Student Edition, The Association
for Investment Management and Research 1990).
Barnwell Two-Way Model
The Barnwell Two-Way Model is a deceptively simple model that classifies investors as
either 'passive' or 'active'. Marilyn MacGruder Barnwell of the MacGruder Agency, Inc.
developed it in 1987.
Passive investors are characterized as individuals who have become wealthy
passively - by inheriting, by a professional career, or by risking the money of others
rather than their own money. To these investors security is more important than risk In
addition, certain classes of occupation are more likely to contain passive investors. For
example, non-surgical doctors, corporate executives, lawyers and accountants who work in
companies. Reasons for this are that these individuals are less likely to have high
financial resources at an early stage in their careers, having had to delay earning good
salaries in order to study or having to repay student loans. Once earning a decent wage,
they are then more careful with their money, having a greater need for security. Anyone,
therefore, with reduced financial recourses is likely to be more risk conscious and,
hence, a passive investor. For these individuals it's important to hang on to their money.
Passive investors make good clients because they tend to trust their financial advisor
and are more likely to delegate the running of their financial affairs. And because they
are risk averse, they tend to like diversified portfolios of investments in quality
companies or investment products. However, they can believe that an investment is more
risky than it is, which may keep them out of potentially lucrative opportunities. Passive
investors are also more likely to need the approval of others and are unlikely to take a
first step into unknown investment territory by being a contrarian. Consequently, they are
more likely to follow the investment herd when it comes to stock market investment and
stick to following the trend.
Active investors, according to Barnwell, are those who have achieved significant
wealth, or earned well, during their own lifetime. They are more likely to take risks in
investing because they have previous experience of taking risks in their previous wealth
creation. These individuals have a high-risk tolerance and less of a need for security.
They also need to feel in control of their investments, often to the extent of becoming
highly involved with the running of their investments, researching or becoming overly
involved with technicalities. The need for control is related to the fact that they have a
strong belief in themselves and their own abilities. Once they feel they are losing
control of an investment situation, their risk tolerance reduces. By being actively
involved and in control, these investors feel they are reducing risk. However such
involvement may actually be detrimental as it is likely to be a source of irritation to
their investment advisor who cannot get on with the business of running their clients
affairs due to constant questioning and harassment. The classes of occupation that are
likely to be active investors include: small business owners who have developed their own
businesses rather than inherited, medical surgeons, independent professionals, such as
lawyers or accountants, who work for themselves rather than a large firm, entrepreneurs,
and self-employed consultants.
Active investors are more likely to get personally involved with the running of their
financial affairs, and may believe they know more than their advisor does. They are less
likely to delegate the maintenance of those parts of their investment portfolio in which
they believe they have experience or have had personal success. However, these individuals
are more likely to be contrarian in their stock picking habits and have less need to be
completely diversified. Age tends to soften their need to be constantly in control, so
that older clients may be more malleable and open to their advisors suggestions.
Bailard, Biehl and Kaiser Five-Way model
Probably one of the most sophisticated models in use, the BB&K approach stresses
the level of confidence an investor has and their preferred method of action - the way
they respond. Level of confidence is reflected in the emotional choices made based on how
much an investor may worry about a certain course of action or decision. Investors may
range from confident to anxious. Method of action is reflected in how
methodical an investor is, as well as how analytical and intuitive they are. This can
range from careful to impetuous.
Within these ranges, the model defines five personalities:
- adventurers - confident 'go for it' types who are strong-willed and ready to take
- celebrities - those who need to be in the center of things and don't like to be left
out, often constantly checking whether they should be in the latest fashionable investment
but may not really have any clue as to how to take control of their finances
- individualists - confident individuals who make their own decisions but who are
methodical, careful, balanced and analytical
- guardians - investors, often older ones, who are cautious and intent on safeguarding
their wealth, shunning volatility or excitement
- straight arrows - Mr or Mrs Average who doesn't fall into any of the extremes
of the above categories, who is somewhat balanced in their investment approach and willing
to take on moderate risk
By understanding the personalities they're facing, the variations in characteristics
according to confidence and response action, and how this is all modified
under different conditions, the BB&K classification system provides investment
advisors with a better way of dealing with clients, as well as choosing which clients to
take on - ie who would make good long-term clients. It can be more clearly seen, for
example, who is more likely to be a contrarian, who is more likely to have a tendency to
leave the running of their financial affairs to their advisor, who is rash, and who is
more likely to be a 'do it yourselfer'. It can also be more clearly seen which clients are
not likely to be good clients at all, because they are predisposed to losing their money.
Research shows that these were often impetuous celebrities, who were prone to
follow a 'hot' stock tip on a crowd-fuelled, speculative bubble. In fact, it was found
that this class of investor presented less frequently as they had either lost their money
already or had accumulated few assets, and so had nothing to invest.
The Nine Money Personalities
A classification produced by Kathleen Gurney of the Financial Psychology Corporation
that stresses money style and how individuals react emotionally to financial decisions.
The nine distinct personality groups identified are developed from her research concerning
why people earn, spend, save and invest the way they do. It is a general financial
typography, therefore, but has particular relevance to investment.
The nine personalities defined are:
- Safety Players - those who take the path of least resistance, looking primarily for
security and safety in their investments and doing what has worked previously.
- Entrepreneurs - a particularly male-dominated profile driven by a passion for
excellence and commitment, and who are not motivated by money in itself. Financial success
is a scorecard and stock investment is a method of implementing and demonstrating that
- Optimists - non-risk orientated, often near retirement, seeking peace of mind, these
are investors who don't like to become too involved with their own financial management as
it would cause them stress and reduce their enjoyment of life.
- Hunters - often educated, high-earning women with an impulsive streak, a 'live now
attitude'. They have a strong work ethic, much like entrepreneurs, but lack the same
confidence in themselves. They may attribute their success to luck rather than ability.
- Achievers - conservative, risk-averse, these investors like to feel in control of
their money, with security and protection of their assets a primary consideration. They
are often, married, well educated, high-earners who feel that hard work and diligence is
more likely to bring financial reward than investing.
- Perfectionists - afraid of making financial mistakes, they tend to avoid investment
decisions altogether. They lack confidence and self-esteem, and have low pride in handling
financial matters, finding every conceivable excuse for not taking action. For them, no
investment is without fault.
- Producers - highly committed to their work, they may earn less due to a lack of
self-confidence in money management. And with a lack of basic financial knowledge they may
have less available funds to invest. They do not appreciate how to evaluate risk
- High Rollers - thrill seekers, power seekers, creative and extroverted, they work
hard and play hard. They have to be involved in high risk investing with a large amount of
their assets. Financial security bores them - even though their actions may have
financially dangerous consequences.
- Money Masters - tending to have a balanced financial outlook that gives contentment
and security, these investors like to be involved with the management of their money and
their choice of investments, although they will take onboard good, sound advice. They are
determined individuals, not easily thrown of their chosen course, and who don't leave
things to luck.
The way the system is used is to highlight a client's personality type through
psychometric testing. The score achieved makes it clearer for clients to face up to the
financial problems they're having or why their investment choices are not as they would
wish. Appropriate advice is then given.
Psychonomic Investor Profiler
This typography is based on my own work in the field. Investors are classified as
either: Cautious, Emotional, Technical, Busy, Casual or
Informed. An underlying assumption is that individuals will treat different aspects
of their life in the same way. For example, if people are cautious by nature, avoiding
danger to themselves, they will also be cautious when it comes to investing their money.
What changes their investment behavior, under variable risk conditions, is not only how
they personally view that risk but also how they view money itself - that is, its gain or
loss. Money is a very powerful agent of behavioral change. This stems from work in
behavioral finance which shows that investors perceive gains and losses asymmetrically;
which simply means that it hurts to lose a dollar far more than gaining a dollar gives
pleasure. Additionally, their behavior is modified by personal bias as well as crowd
pressure - together forming their internal market and the external market that then acts
on their decision-making ability. In this way an investor's level of cautiousness also
changes. The approach differs from other systems, therefore, in that it doesn't assume
that people have totally different attributes depending on the circumstances they're faced
with. In a psychonomic approach, investors have the same attributes but they are mitigated
- or their balance changes - according to the situation and the way they deal with it.
Consequently, many typographies, have risk as a part of the classification itself - ie
The 'Risk-Seeker' - which is problematic. Two investors with the same profile
characteristics may make very different financial choices. What's different about them is
their propensity for risk, not their innate characteristics. In the psychonomic investor
profile, individuals are assessed according to whether they have a high, medium or low
propensity for risk, within their particular balance of personal characteristics.
The six investor types are:
- Cautious - very conservative, this investor has a need for financial security and
will avoid high-risk ventures as well as listening to professional advice, preferring to
conduct their own financial affairs. They don't like to lose even small amounts of money
and never rush into investments, always giving financial opportunities a great deal of
- Emotional - easily attracted to fashionable investments or 'hot' tips, these
investors act with their heart and not their head. A whim or a gut feeling leads their
decisions, and they have great difficulty disengaging from poor investments or cutting
losses. They have an unreasonable belief that things will come right in the end and often
put their trust in luck or 'providence' to safeguard their financial assets.
- Technical - hard facts - numbers - lead this type of investor to active trading
based on price movements. They are screen-watchers, sometimes obsessional, but their
diligence can be rewarded if they spot trends. They may also have a tendency to 'need' and
buy the latest technology as they are always looking for some edge.
- Busy - these investors need to be involved with the markets, it gives them a buzz
when they check the latest price movements, which may be several times a day. They
have to keep buying and selling - on rumors, on overheard gossip, from the mass of
newspapers and magazines they collect. Any tidbit of information they can glean is imbued
with significance and a cause to take financial action.
- Casual - a laid-back attitude to investment, these individuals are often hardworking
and involved with work or family. They tend to believe that once an investment is made it
will take care of itself, and that a good job or a profession is the way to make real
money. They easily forget that they own investment assets and rarely check on their
financial affairs. And, though they may leave the running of their investments to
professional advisors, they haven't been in contact with them for years.
- Informed - uses information from a variety of sources and keeps an ongoing watch on
their investments, the markets and the economy. They listen carefully to financial
opinions and expert assessments, and will only go against market fashion, as a contrarian,
after weighing up all the pros and cons. They are financially confident and have faith in
their decisions, knowing that knowledge and experience will always win out to give them
Profiling and typographies help individuals to become better investors by highlighting
deficiencies in investment style and behavior or how an investor is interacting with the
market - for example, trading too frequently, selling too early, inability to cut losses,
or a failure to use information effectively. But what type of investor are you? Hit the link to
test yourself and find out with an interactive online version of the Psychonomic
What is the future for investor profiling?
Psychologically based profiling and classification systems are gaining popularity, and it is my
feeling that in a few years many brokerage houses will be using them regularly to aid
in tailoring investment advisory services to their clients needs. As such they have an
important role to play within traditional advisory methods. And for the clients
themselves, any method that clearly demonstrates to them where they've been making
investment errors is, by definition, a useful financial tool.