Behavioral Finance and Investor Types: Managing Behavior to Make Better Investment Decisions

Chapter 4

Introduction to Personality Theory

After completing Part One of the book, readers should have a basic understanding of why self-defeating behavior in general is important and, in particular, why understanding behavioral finance is crucial to making good financial decisions. Before we move into the details of each behavioral investor type in Chapters 8 through 11, we will spend the next three chapters learning about the history of personality and personality theory, the history of personality type testing, as well as the framework for the creation of behavioral investor types. Armed with this knowledge, learning about each BIT will be easier and you will take more away from it. In addition, you will get a better feel for why the questions asked in Chapter 7, the BIT quiz, are asked the way they are, and what information we are looking for to make a BIT assessment.

The fact is that if we are to fully understand how we as individuals make decisions about investments and create profiles of various types of investors, we need to take a step back and understand how the study of human characteristics and traits has evolved over the years. This chapter aims to introduce the reader to the rich history of thought and research in the field of personality psychology. Along the way you will learn about some of the techniques used in this sub-discipline of psychology, as well as some interesting facts about the psychologists whose theories will be reviewed and compared below. Additionally, ...