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

Preface

Over the past 20-plus years of working in the investment advisory business, I have been lucky enough to establish and build satisfying relationships with many different kinds of people. When I say “different,” I mean in terms of temperament, occupation, economic circumstances, social strata, gender, and other factors. I've learned that human psychology is complex (big surprise!) and that people form their attitudes and habits in multi-faceted ways; attitudes and habits about everything from eating, to approaches to working, to interpersonal relationships and—you guessed it—money and investing are all part of the intricate web of the human mind. When working with something as important as a person's money, it is extremely helpful to understand what behaviors might be affecting their decision-making processes.

These decisions are based on two basic psychological ideas: emotions and cognitions. Emotions generally have to do with how people feel while cognitions have to do with how people think. At first blush, this distinction may not appear overly helpful, but it is. It provides a framework for understanding how people think and act in relation to their money. The book will cover this emotional-cognitive idea in due course. But first, an introduction to the overall thinking behind the book is in order.

AN IMPERFECT SCIENCE

Although it might seem to be an impossible task to try to categorize people by their behaviors, many thoughtful people have tried to do so. Many of the ...