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

Chapter 5

The History of Personality Testing

In the last chapter we reviewed the history of personality theory. We are now moving to the practical realm of how to test for personality traits. This chapter provides background on personality testing to give you a sense of how personality tests have developed over the years and how we can think about how to assess an investor's personality traits. In the next chapter there will be a test for Behavioral Investor Types and individual biases that will be based in part on the techniques and concepts presented in this chapter. What is important to keep in mind is that initially we are trying to determine what orientation a given investor has and then test for what biases that orientation is likely to have. As has been repeated several times—intentionally—we need to correct for the biases that may cause serious problems in terms of sticking to an investment plan over the long term.

TYPES OF PERSONALITY TESTS

There are two basic kinds of personality tests: objective and projective tests. An objective test is usually a pencil and paper questionnaire. Answers to each item are either true/false or multiple choice. These tests are considered highly structured because of the limited amount of freedom the subject has in terms of his available responses to the test's questions. Objective tests are scored in a straightforward manner. In the next chapter you will see that we are using an objective test rather than a projective test.

As mentioned, ...