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. Charlie-----------*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 HumanBernstein, The Investor's QuotientJung, Collected Works Keirsey, Please Understand Me: Character and Temperament TypesKroeger, Type TalkNemeth, The Energy of Money
Interesting post CharlieMy background is in psychology. I teach psychology and also am a Marriage, Family Therapist. I am an INFP (split between T/J)and find the Meyers Briggs works very well in career counseling.Awhile back I wrote a book, together with three other women, called "What a Woman" - a financial planning guide for the newly independent. We all came from different backgrounds. I focused on Prosperity and Poverty Scripts, which I believe have a lot to do with our view of money. Here they are:Seven Components to a Prosperity Mentality1. Awareness, 2) Healthy Self Esteem, 3)Purpose, 4) Ability to let go,5) Information, 6) Plan and 7) Action.Seven Components to a Poverty Mentality1) Negative or outdated messages accepted as reality2) Distorted perception, 3) Low self esteem, 4) Unrealistic expectations,5) Fear, 6) Inability to let go and move on and 7)Self sabotage.
Thank you, Open, for your reply.A post like yours makes taking the risk that I did in posting mine well worth it. (All writing is a self-exposure that carries risks, right?) I'll need to read your book to ask a good question, but let me throw this out anyway. There is always a raging debate in trading circles between those who favor mechanical systems and those who favor discretionary trading, which never gets resolved to anyone's satifaction. But if an indivdial can point to a high "N" score, e.g, might not they be a better candidate for discretionary trading than their opposite, and on the basis of being confident about who they are, typewise, be more likely to endure and overcome the inevitable challenges and discouragements of that approach rather than merely cycling between the two, ending up getting nowhere?Same-same with the investor/trader split, or the short-term/long term split? There's nothing inherent in the financial tools or methods themselves that make them better or worse, but the personality of the user? Yes, I'd wholeheartedly agree with you about the importance of the positive/negative scripting stuff, which people like Douglas, Brown, Kiev, Roosevelt, Elder, etc. deal with in their books (which I chose not to list), but I was trying to focus on how we as investors are different from one another, rather than what we have in common, or do you think that approach wrong-headed? The reason I take that tack is that nothing is going to work every where, all the time. All methods fail cyclically. (There is no Holy Grail, as they say.) But if an individual knows her/himself well, they are more likely to be able to endure the hard times that will happen to them before their approach will flower again and bring the rewards characteristic of it. In others words, on the basis of self-knowlege, one can choose one's battles and wars carefully, stacking the odds of success, and -- more importantly-- one will have the strength of chacter and conviction to ignore or refute the supposed expects (who more than likely don't have the same type), simply by saying: "Well, yes, that's fine for you and a clever and impressive argument, but I am not you, and this is what works best for me."In a lot of ways, I would argue that teaching investing is like teaching writing. People know how to do it. It's just that they don't know that they know how to do it, and the "teaching" is mostly the midwifery of enhancing self-confidence. At least that was my classroom experience when I taught the lower-division rhetoric series. If I could create a situation where students felt safe, where the whole class was their peers and they weren't just "writing for the teacher", they blossemed like flowers and did brave and wonderful things in front of an audience, giving each other feedback and support in ways they experience in other parts of their lives, but not typically in an English class. TIA, Charlie
While I certainly don't want to disparage psychology in investing, I do want to keep pointing out that choices in investing strategy can also have their primary basis in optimization, given ones goals and circumstances.I may not have much patience with day traders, but for someone trying to get rich quick or trying to earn a living by "investing," dripping money into an index fund isn't going to hack it.On the other hand, for those of us who can calculate means to achieve life-style maintenance in retirement by living within our means, and putting away as much possible in diversified investments, that's what makes sense.Charlie feels he needs to beat the boring approach to survive, partly because he can't put away enough with the career path he has taken, partly because he wants to guard against living to be very ancient, and partly because he expects awful things to happen to the economy and he is a bit of a survivalist. I think we can put away enough for our needs, even if we live long, and that the only way I can protect against awful things happening in the economy (which wouldn't surprise me) is diversification, with overly heavy emphasis on cash.
Loki,The question your reply prompts me to ask --both of myself and of you, concerning the choices each of us is making-- is how much of our choices is truly rational and how much is driven by our personalities and innate proclivites, which then, after the fact, scrape togther the external "evidence" to justify the choices already made by our unconscious processes?There was a really light-weight article in this month's "Psychology Today" that explores the role of intuition in decision making and asks about the extent to which it can be trusted (without ever really getting around to answering, it other than to say that intuition can mislead.) Just as there are asset allocators who attmpt to prove that 80% of one's investment returns come from allocation --i.e., being in the right sectors at the right time, which doesn't preclude or exclude an all-weather strategy such as you seem to follow-- , there are those who argue that investing --and especially trading-- success is at least 80% psychology once the basics of money mangement and a trading system with positive expectancy are put into place.I don't know what the answer is, but I don't think it is some cop out compromise. I think one's personality matters a lot, and one's attitude matters a lot, to investing success. How much is something I'm exploring.Charlie
Charlie,I'm sure personalities always come into play, but we can also look at objective conditions for different people and history and statistics.There are a lot of folks who probably could play my conservative approach successfully, who just can't help trying to beat the odds—even some of the Motley Fool staff admit that's what motivates them to try stock picking (I still say it's to sell the program) while they occasionally point out that index investing wins on the average. Research consistently shows that those who move around a lot do worse than those who sit tight, but it doesn't stop many (more males than females) from trying.My point is, if you start knowing what you need to achieve, then you can make decisions objectively. If you can survive conservatively, then you can get your jollies with a little side bet money—some day ttrade for the fun of it; I look for high risk companies of the next millennium.If you can't achieve goals with a conservative strategy, then there is no choice to get more aggressive.
Loki,It never ceases to amaze me how differently people look at the same situation. My preference is to explain a person's choices more in terms of the person themselves, and less in terms of their circumstances, because that's my experience and what makes sense to me. You weight the factors differently, creating a different epistemology, and derive different action plans. But I will continue to disagree that either of us is being any more or less "objective" than the other. What would seem to matter is not the correctness of either approach, but their utilities in a self-fufilling sort of thing: what one thinks is important becomes important. My assertion is that psychology is crucial to investing success. You demur. What do others think?Charlie-------------"A way of seeing is also a way of not seing. (Feynman (sp?), the physicist, and if not him, then Buddhist parables.)
The main thing is to make sure you've found the right risk/reward for your investing. Also, avoid denial. If you think you're beating the market and you're not, then what is the point?In Smart Money a few years ago I read about a doctor who year after year "invested" in losing schemes. That when psychology really becomes an issue.
David Dreman has been talking about psychology in investing for years in is column in Forbes magazine and also in his book "Contrarian Investment Strategies."rlbar
Hi Charlie:There's nothing inherent in the financial tools or methods themselves that make them better or worse, but the personality of the user? ? I agree with what you say. I think one's personality can make a big difference, especially if there is a tendency to be Closed vs.Open Minded. I was trying to focus on how we as investors are different from one another, rather than what we have in common, or do you think that approach wrong-headed? I don't think there is one Right or one Wrong approach. Personally I think one has to look at the whole picture - what we have in common, as well as our individual differences are. But if an individual knows her/himself well, they are more likely to be able to endure the hard times that will happen to them before their approach will flower again and bring the rewards characteristic of it. In others words, on the basis of self-knowlege, one can choose one's battles and wars carefully, stacking the odds of success, and -- more importantly-- one will have the strength of chacter and conviction to ignore or refute the supposed expects (who more than likely don't have the same type), simply by saying: "Well, yes, that's fine for you and a clever and impressive argument, but I am not you, and this is what works best for me." I whole heartedly agree with your statement. The key is definitely self knowledge, being open to look within, owning and admitting one's strengths and weaknesses and being willing to learn. I do my best to accept my mistakes as "gifts" that teach me to do things differently in the future (easier said than done) If I could create a situation where students felt safe, where the whole class was their peers and they weren't just "writing for the teacher", they blossemed like flowers and did brave and wonderful things in front of an audience, giving each other feedback and support in ways they experience in other parts of their lives, but not typically in an English class. .Again Charlie I agree wholeheartedly. Safety, Integrity and Trust are the best tools for learning. As far as my investing experience has been concerned it has been very humbling. I got involved with NAIC, at the beginning of the Bull Market. I thought the NAIC SSG Toolkit was the answer. However, it wasn't until later I realized how judgment affected the SSG. I also got seduced with the tech bubble and didn't follow NAIC's principles, but everything seemed to be working. I followed the buy and hold principle, and bought on dips ( my personality is "Getting Value"- the reality was I really didn't know what I was doing.) and then everything crashed. Luckily I put a larger percentage of our money in CD's and some Bonds, because Ilost a lot of money (both on paper and real) because I didn't really "understand" what I was doing - was I following the crowd? Probably. I put my toe in the Stock Market the last time interest rates were low. My mother who was living on her savings. Handed over her money and asked me to get more income. The first stock I bought was IBM, because it was paying a bigger dividend than I could get at the bank, and it was a blue chip stock, so I bought some shares for her. Two weeks later it was half what I paid and the dividend was reduced that was my introduction to the stock market. From then on I started reading the Wall Street Journal, some money magazines, joined NAIC and got involved with Motley Fools. I'm not math oriented but I really love learning, even though it takes me a long time to understand some of the concepts. Now as you know I am tackling Bonds. Sorry for rambling.
Charlie,As I've written before, the problem in studying complex behavior is that people bring so much in the way of previous experience and such differing ability to each decision that scientific study is near impossible. Sure, we can observe a lot of people, and come up with more or less broad classifications, but do those classifications have any value in predictiing other complex behaviour ? I doubt it. Obviously we use our own intuitive classifications every day when dealing with others. Good poker players use such judgement regularly in the limited area of betting a hand.The only convinincing (to me) approach to personality theory is the factor analytic approach, and when I took Guilford's class I think he was close to 100 factors. As I recall, Guilford believed he had good classification technique, but I don't think he believed it had predictive value. The Myers-Briggs approach is a short cut to a factor analytic classification. By the way, I would fall between an INTJ and an ENTJ in the simple classification that results from the four question inventory. I do enjoy spending time by myself and I don't particularly enjoy parties, but I'm good at public speaking and I do initiate converstations with strangers. I'm afraid we're all a tangle of complex thoughts, and the decisions we make from which behaviour can be observed are rarely consistent.Disclosure: I was trained as an experimental psychologist, specializing in binaural auditory processes, but most of my career I directed a high tech group that developed speech recognition. There have been efforts by several excellent experimental psychologists to reify the principles of personal theroies, but those efforts have failed to account for the data according to the authors of the studies.dbdb
Open,Much thanks for your positive feedback, and my sympathies on your painful introduction to market realities. A suggestion. Don't dis NAIC. I took their classes, and their insights and methods can be effective tools for identifying the WHAT. It's their nearly complete avoidance of how to determine WHEN that drove me crazy and that's where the method can get itself into trouble, projecting the past onto a present which isn't confirming that past (through price and volume). The fundamantal stuff is the hard part: learning what the financial numbers are really saying and how voracious (and fickle) a discounter the market is of those numbers. The tech stuff is easy. Basic stage analysis and couple of moving averages and relative strength are sufficient tools to filter noise from signal. The NAIC method worked overly well from about the third week in Dec '94 until the second week of March '00, then all hell broke loose and the tech bubble burst. But a careful NAIC user would have already gone mostly to cash long before due to seeing the overvaluations and taking prudent profits. That's what got them into trouble: getting sucked into the momentum game instead of sticking to their knitting as fundamentalists/value investors. (Yes, the NAIC method has an intrinsic growth bias, but GARP is a way to moderate that.) One huge advantage of NAIC is that it is a group effort and typically depends on excellent resources like ValueLine that have withstood the test of time. Not infallibly so, mind you, but with statistical significance.Yeah, lots of people are scrambling right now, trying to reorient and regroup and are changing horses in mid stream, rather than hunkering down and setting themselves up for the next cycle when their methods will again flower. All methods fail cyclically. The problem is the cycles don't announce their beginings and endings, and as soon as you get bored and blink, or as soon as you give up in dispair, the market does exactly what you were waitng for, but you are no longer there as part of it. Patience. Patience and balance are hugely important to investing success. Managing oneself --the emotions of fear and greed, hope and dispair --is as important as managing one's evidential resources. Best wishes, Charlie
db, a thought reply. Thank you.If not predictive ability in an overwhelming sense, at least a statistically measurable edge might be derived from personality theory? That so many investors/traders fail isn't unusual. The numbers are about what they are for small business start ups, and investing/trading are properly understood as businesses. But the intriguing question for me is why are the survivors and winners so persistently survivors and winners and share certain psychological characteristics despite the diversity of their methods? The indexing crowd appeals the the lucky penny metaphor to dismiss their achievements but recent academic work suggests just the opposite: theiir results way beyond chance. And there is abundance anecdotal evidence as well. Are you familiar with Schwager's series on "market wizards"? Attention to (self-)psychology was the common theme of the interviewees. They knew they were trading themselves as much as they were trading markets.Charlie
I was trained as an experimental psychologist, specializing in binaural auditory processes, but most of my career I directed a high tech group that developed speech recognition.Could you define "binaural"? I have heard the term before - it was the title of the last Pearl Jam album, I believe - and always wondered what it meant. My dictionary was not specialized enough to include it. I realize I could do a google search and try to determine the meaning from context and usage, but I'd like a simple definition from an expert.Thanks in advance.-J8
The essentials of investing are: saving, planning, complying to a plan, changing plans when necessary and learning about investing options and new approaches for potential application.In my mind the performance of these essentials implies that one must be aware of one's individual responsibility for accumulating wealth and the need to delay current rewards for future ones. Where psychology enters the equation, I am not certain.I can see where one must possess the discipline to make savings a habit and comply to a plan, yet be flexible enough to make adjustments when necessary and to gain new investing knowledge. Are there psychological issues here? Psychologically what prevents people from looking beyond the present and/or having unrealistic expectations of future wealth accumulation - too often based on a get-rich-quickly scheme or more aptly - a dream? The individual impetus to change old habits and form new ones goes back, I believe, to one feeling that they are responsible for their actions and well being. Many people are not sufficiently disciplined to follow an initial plan and wander from one approach to another without supporting evidence for changes. To establish discipline one must have sufficient confidence in one's choices, i.e. be convinced that investing choices can be made logically and with reason. Being convinced of a logical basis, it would follow that individual initiative in acquiring investment knowledge (and not by group think) could lead to more/better investment options. Summing this all up leads me to conclude that successful investing depends greatly on one's outlook on life and more specifically whether one judges one has some control over one's circumstance or is a victim of them.Regards,fingfool
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