Ever wish you could get to the root of why your budgeting habits are less than ideal? Or perhaps you’re out to master your investment decision making process.
Finding out your money personality is a great start to developing the management, saving and investment strategies that are going to work best for you. Understanding your financial attitudes, habits and dispositions can help you protect and grow your wealth more effectively.
What are some of the theories?
Psychologists and other academics have studied financial behaviour for several decades. Our attitudes to money are largely thought to be learnt over time and will depend on your childhood and the environment you grew up in. If you look at your parents’ attitudes to money, are you emulating them in your choices or actively taking the opposite approach?
You can also take advantage of models that have been developed to identify different ‘money personalities’ or distinct attitudes and approaches to managing personal finances.
The Nine Money Personalities Model proposes that everyone identifies with one of nine types: entrepreneur, hunter, high roller, safety player, achiever, perfectionist, money master, producer, or optimist.i
More simplistic models fall along the lines of: savers, spenders, risk averse, gamblers and those not really paying attention.
Some models focus purely on a person’s behaviour as an investor. Specifically, they try to make sense of different levels of risk-taking.
The study of peoples’ engagement with risk is a big part of investment psychology. When it comes down to it, risk and reward is a very primal thing; our relationship with risk is a factor in most areas of our lives, from romantic relationships to recreational activities. In investment, tolerance and/or appetite for risk plays a big role in how you approach wealth creation.
Perhaps the best known risk profiling theory divides investors into two groups: active investors and passive investors. Passive investors tend to be risk averse and less comfortable with the ‘peaks and troughs’ that can characterise some investments. They are likely to choose ‘safe’ or conservative options. Active investors, as the title suggests, are more comfortable with risk. They like to feel in control of their investments, staying active in researching, analysing and decision making.
The Bailard, Biehl and Kaiser Five-way Model is a little more complex.iiIt looks at investor confidence and preferred approaches to sort people into five groups. There’s adventurers (confident risk-takers), celebrities (hooked on the latest ‘hot tips’), individualists (confident but careful and analytical), guardians (conservative and focused on protecting their wealth), and straight arrows (average investors with a balanced approach).
How to work out where you fit (and then what to do about it)
Working out your risk profile or money personality, using any reputable scale or model, is a great way to better understand your unconscious biases towards money. Whether you want to fine-tune your everyday money management, get rid of bad financial habits or achieve better investment results, it’s an important starting point. For example, say you’ve found your investment returns limited because you can’t bring yourself to consider anything beyond the most conservative portfolio.
On the other end of the scale, if you’re tired of the ups and downs that tend to come with a more aggressive portfolio, knowing how and why your personality makes you predisposed to risk-taking is a good way to help yourself avoid situations where you make impulsive or overzealous decisions.