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

Chapter 9

The Follower

Name of Behavioral Investor Type: Follower

Basic Orientation: General lack of interest in money and investing and typically desires direction when making financial decisions.

Dominant Bias Type: Cognitive, relating to following behavior.

Impactful Biases: Recency and Framing

Investing Style: Passive

Level of Risk Tolerance: Generally lower than average but often thinks risk tolerance level is higher than it actually is.

A Follower Behavioral Investor Type describes an investor who is passive and often lacks interest in and/or has little aptitude for money or investing. Furthermore, Follower investors typically do not have their own ideas about investing. Rather, they may follow the lead of their friends and colleagues, or whatever general investing fad is occurring, to make their investment decisions. Often their decision making process is without regard to a long-term plan. They sometimes trick themselves into thinking they are smart or talented in the investment realm when an investment decision works out, which can lead to unwarranted risk seeking behavior. Since they don't tend to have their own ideas about investing, they also may react differently when presented more than once with the same investment proposal; that is, the way something is presented (framed) can make them think and act differently. They also may regret not being in the latest investment fad and end up investing at exactly the wrong time, when valuations are the highest.

One of the ...