Behavioral Investor Types (BIT)

Basic type: Passive Risk tolerance level: Low Primary biases: Emotional Passive Preservers, as the name implies, are investors who place a great deal of emphasis on financial security and preserving wealth rather than taking risks to grow wealth. Many have gained wealth through inheritance or by receiving high compensation at work. Because they have gained wealth without risking their own capital, PPs may not be financially sophisticated. Some PPs are “worriers”; they obsess over short-term performance and are slow to make investment decisions because they are not comfortable with change. The emotional biases most common to PPs are endowment, loss aversion, status quo, and regret aversion. They may also exhibit cognitive errors, such as anchoring and adjustment and mental accounting.

Basic type: Passive

• Risk tolerance level: Low to medium
• Primary biases: Cognitive

Friendly Followers are passive investors with a low to medium risk tolerance who tend to follow leads from their friends, colleagues, or advisers when making investment decisions. They often want to be in the latest, most popular investments without regard to current market conditions or the suitability of the investment to the FFs long-term goals. Often overestimate their risk tolerance. Their decisions typically are influenced by availability, hindsight, and framing biases. Resolution of cognitive dissonance is an important factor to FFs. Regret aversion, as it relates to herding behavior, is an emotional bias with a significant impact.

Basic type: Active

• Risk tolerance: Medium to high
• Primary Biases: Cognitive

An Independent Individualist is an active investor with medium to high risk tolerance who is strong-willed and an independent thinker. IIs are self-assured and “trust their gut” when making decisions; however, when they do research on their own, they may be susceptible to acting on information that is available to them rather than getting corroboration from other sources. Sometimes advisers find that an II client made an investment without consulting anyone. Of all behavioral investor types, IIs are the most likely to be contrarian, which can benefit them. II biases are typically cognitive. Conservatism, availability, confirmation, and representativeness biases are common to IIs. Overconfidence and self-attribution biases are the emotional biases that IIs sometimes exhibit.

• Basic type: Active
• Risk tolerance: High
• Primary Biases: Emotional

The Active Accumulator is the most aggressive behavioral investor type. These clients are entrepreneurial and often the first generation to create wealth; and they are even more strong-willed and confident than Independent Individualists. At high wealth levels, AAs often have controlled the outcomes of non-investment activities and believe they can do the same with investing. This behavior can lead to overconfidence in investing activities. AAs often have high portfolio turnover rates, which normally is a drag on investment performance. AAs are quick decision makers but may chase higher risk investments that their friends or associates are suggesting. If successful, they enjoy the excitement of making a good investment. AA biases are typically overconfidence, self-control, and illusion of control. As a result of these biases, they may be overly optimistic about their investment choices.

Individuals may exhibit both cognitive errors and emotional biases.Individuals may exhibit characteristics of multiple investor types.Individuals will likely go through behavioral changes as they age. Individuals are likely to require unique treatment even if they are classified as the same investor type because human behavior is so complex.Individuals act irrationally at different times and without predictability.