The psychology of investing – why your personality type could be capping your returns

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Broad personality categories, such as introvert or extrovert, can be limiting in what insight it gives person about their subconscious choices and influences.

James Brook, organisational psychology and creator of talent assessment tool TalentPredix shared with Express.co.uk why these types of personality assessments don’t work and what personality traits could be holding investors back.

He began: “Personality traits can have a significant impact on the way people invest, particularly their appetite for risk and the proportion of income they invest.

“Personality assessments can give investment companies useful insight into how their staff and investors will act.”

“However, traditional psychometric approaches divide everyone into a few broad ‘types’, which often overlook our unique combination of traits and our personal motivations.”

When in investing, it is generally recommended people to begin with figuring out what the financial goal is that they would like to achieve with this investment.

With this in mind, personality traits and qualities affect ones investing from the very beginning by dictating the motivations behind the investment.

Woman

Personality types can’t truly be defined simply by introvert or extrovert (Image: GETTY)

There is a multitude of personality assessments available, from simple extrovert or introvert quizzes to Myers-Briggs Type Indicator, all of which offer varying level of insights into one’s natural state of mind.

Different personality types hold different traits, values as well as qualities, and it’s the combination of all three that make each persons investing approach unique.

Mr Brook continued: “Qualities like conscientiousness, pragmatism and forward-thinking will determine how much money people are prepared to invest every week/month.

“Traits affecting risk-taking such as decisiveness, courage, self-confidence and tolerance of ambiguity will also determine the type of risk profile investors have.

“In other words, whether they are prepared to invest in risky assets like start-ups and developing economies versus lower risk assets such as bonds and established markets.”

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Personality traits

Personality traits, qualities and personal values all play a role in investment decisions (Image: GETTY)

Risk appetite will also differ depending on ones experience with investing and the financial goals they intend to achieve with their investment.

Someone making their first investment with an expected investment time-line of five years will usually opt for a very low-risk investment.

Comparatively, an experienced investment looking to invest for a decade or two will have a much larger risk appetite.

“People high on agreeableness are also more likely to follow investment trends and the advice of experts,” he added.

“While more independent, non-conforming people are likely to be contrarians and invest in disruptive sectors.”

Mr Brooke commented that this phenomenon is because highly agreeable people are more likely to trust others and be willing to follow the crowd unlike their non-conformist counterparts.

As a beginner investor it is generally easier to try follow in the footsteps of investing moguls like Warren Buffet, but it’s incredibly important to keep in mind that investing is a personal endeavour.

An investors personal goals and current financial circumstance must always be taken into account to avoid losing more than they can afford to.

Additionally, past market behaviours can be used as indicators of future trends but relying too much on what investors in the past have done can be detrimental.

“Yet it is assessing how these different traits co-exist in one individual and how some qualities combine to exaggerate certain behaviours or keep others in check, that will provide clearer insight into how a person approaches investment.”

By obtaining this insight, it will be easier for a person to see when they are making investment decisions because they genuinely believe it will be a good investment or if it’s because their subconscious is having a say in it.

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