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Author: imcharliehm Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35344  
Subject: OT: the Role of Psychology in Investing Date: 10/26/2002 4:15 PM
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Caveat: This is an exploratory post, not a formal presentation, for my never having done course work or research in the subject. It's a cracker-barrel essay, and an incomplete one at that, just to get the topic in front of the community.

There is an emerging academic field called behavioral finance that offers insights into how people evaluate risk(s) and how they (typically) make poor money decisions, but that isn't the kind of psychology I want to talk about, because of their focus on what people do in common, rather than on what the differences are among individuals that motivate differing actions. In other words, I want to talk about psychology in the old-fashioned sense of personalities, which everyone will readily agree differ immensely from one person to the next as do their reactions when confronted with the same stimuli, with some people making smart decisions and some people making dumb ones.

My question is this: If we each are different in our personalities, are we so different that useful typologies –-money types*, if you will-- can't be created, such that one could predict from one's personality which investment approach would likely give the greatest success (for being its more easily understood and more willingly followed)? And I don't mean those one-dimensional questions on “risk-tolerance” that show up in asset allocation quizzes, but things having wider applicability to all of our lives and our interactions with other peoples and events.

Personality schemes are ancient, and it's not my intention to review their history, nor to disparage any of them. (Even simplistic four-type theories like the medieval's “choleric, phlegmatic, sanguine, melancholic,” when used skillfully, yield good results.) Probably the theory of personalities most non-pysch majors are familiar with is the commercial adaptation of Jung's type theory (the Meyers-Briggs stuff, via a work place seminar or independent reading), namely, the four pairs of discriminators: extraverted/introverted, sensation/intuition, thinking/feeling, judging/perceiving that are used to create 16 “types”.

[Caution: There is a whole lot more to Jung's theory than that, with most of the popularizations avoiding a discussion of the role of the inferior functions and their interplay with primary functions, etc., but even the simplest of introductions can be useful- IMHO. For the record, I'm an INTJ, with splits between I and N, T and J, rather than clear preferences. ]

It's my belief – and only an untested belief at this point—that the first step in choosing an investment approach should be figuring out one's personality type, not one's balance sheet/income statement/cash flows, which I base on the following assumptions:
#1 It's not the financial tool that matters to success, but the person using the tool.
#2 Fit the tool to the person, not the other way around.

If this thread gets a good response, I'll lay out more material and participate actively. Otherwise I'll let it die. This is one of those instances where I know I'm right, and my concern isn't to convince others of the utility of the insight, but to find some fellow travelers and kick around ideas.

*There are some commercial services available that will calculate your “money type “ for you on the basis of taking a quiz and paying a fee, but we Fools cut out the middlemen and do things for ourselves.

Selected Biblio:
Arraj, Tracking the Elusive Human
Bernstein, The Investor's Quotient
Jung, Collected Works
Keirsey, Please Understand Me: Character and Temperament Types
Kroeger, Type Talk
Nemeth, The Energy of Money
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