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Behavioral Finance and Investor Types: Managing Behavior to Make Better Investment Decisions by Michael M. Pompian

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Chapter 7

Behavioral Investor Type Diagnostic Testing

Congratulations! We are now ready to apply what we have learned in the first six chapters in practice. As we observed in Chapter 5, there are two basic ways to create a personality test, objective and projective. Recall that an objective test is usually a pencil and paper questionnaire, and 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. In projective tests, people are presented with arbitrary, open-ended test items. Items in this kind of test are arbitrary and also the tests themselves are unstructured by design. In this chapter there are two objective tests that are intended to do two main things. The first is to determine the orientation of the investor—that is, what basic type of investor we are dealing with. The second is the identification of individual behavioral biases. I call the first test “Step 1” and the second test “Step 2.” As noted in the last chapter, there are four basic orientations that I have identified. These again are:

1. Preserver BIT
2. Follower BIT
3. Independent BIT
4. Accumulator BIT

It is important to keep in mind that just because a person is oriented toward or identified as one BIT versus another, it does not mean that they won't have attributes of other types. For example, you might have a person that has a Preserver ...

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