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  • Adam Schacter

Evaluating your behavioural biases - Part 3 of 3

Dear Reader,

We are by no means perfect beings.

“Optimism is the faith that leads to achievement. Nothing can be done without hope and confidence”. – Helen Keller People make 35,000 decisions per day, and so by sheer volume, we are easily prone to making mistakes. From an evolutionary perspective, our very own life experiences instill preconceptions and biases in us that allow us to interpret the future with greater efficiency. If a saber-toothed tiger were found to be lurking in the tall grasses yesterday, one would tread lightly while passing through the tall grasses today.

These preconceptions and biases are subconscious and form part of what makes us all individuals. Although we cannot remove them, it is helpful to identify and to understand them, so as to limit future decision-making errors in our ever-growing path towards continuous improvement.

Behavioural economics studies the biases, tendencies, and heuristics that affect the decisions we make. It aims to discover whether we make good or bad choices and whether we can be guided to make better choices.

This 3-part segment aims to explore the top 20 behavioural biases that assist (and sometimes hinder) the way we make our choices and then allows you to determine what type of investor you might be.

For reference throughout, we have used content from The Decision Lab, a socially-conscious applied research firm that provides consulting services to some of the largest organizations in the world in solving some of their thorniest problems using scientific thinking. The Decision Lab carries out research in priority areas and runs one of the largest publications in applied behavioral science. More information can be found at

In Parts 1 and 2, we explored 20 behavioural biases and provided real-world examples to help you identify them. You can find Parts 1 and 2, as well as past publications, at

In Part 3, we will examine the 8 personality types to determine who might be out there. Can you identify any of them in yourself? I sure can.

What type of investor are you? An overview of Behavioural Biases

Behavioural biases can be broken down into cognitive biases and emotional ones. A cognitive bias is a systematic error in thinking that occurs when people are processing and interpreting information in the world around them and affects the decisions and judgments that they make. The human brain is powerful but subject to limitations.

An emotional bias is a distortion in cognition and decision-making due to emotional factors. That is, a person will be usually inclined to believe something that has a positive emotional effect, that gives a pleasant feeling, even if there is evidence to the contrary. Gender and Behavioural Finance Gender and behavioural finance is a potent subject. Men and women behave quite differently when it comes to investing, and it is important to understand these differences.

One of the most prominent and comprehensive gender-focused studies on behavioural finance was completed by Barber and Odean, called “Boys Will Be Boys: Gender, Overconfidence and Common Stock Investment”.

This study concluded that men are more subject to the Overconfidence Bias than women, as reflected in trading behaviour. By examining investment transactions of 35,000 households over a seven-year period, the researchers found that men on average traded 45% more than women. Single men on average traded 67% more than single women.

When it came to returns, Barber and Odean found similar results. Women only underperformed a buy-and-hold approach by about 1% on average, while men underperformed by 1.4% and single men by 2% on average. It appears that women in a household reduce the family’s risk-taking and have more patience than men when it comes to investing activities.

In the Institutional Investor’s Journal of Wealth Management, John Longo and Michael Pompian published an article entitled “A New Paradigm for Practical Application of Behavioral Finance: Creating Investment Programs Based on Personality Type and Gender to Produce Better Investment Outcomes”.

They administered the Myers-Briggs Type Indicator personality test and a behavioural finance bias questionnaire to 51 women and 49 men. The researchers asked: “Did respondents of opposing personality extremes—and male and female respondents—reveal different investor biases?”

For example, did extroverts respond to a particular question differently from introverts, and did women respond differently from men? Their findings showed that many personality types and both genders are differentially disposed to numerous behavioural biases. In regard to gender differences, here’s what they found:

  • Women are more susceptible to the hot-hand fallacy than men. Under the hot-hand fallacy, people believe that random sequences with no automatic correlation display a positive correlation in reality. For example, many basketball coaches and players believe that a player who has made several shots in a row has a “hot hand” and is more likely than usual to make the next shot; that is, they see patterns where perhaps none exist.

  • Men are more overconfident and optimistic than women.

  • Women are more likely to buy and hold.

  • Men are one-third more risk-tolerant than women.

Alexandra Niessen and Stephan Ruenzi from the University of Cologne completed a study entitled “Gender and Mutual Funds”, in which they examined all single-managed U.S. equity mutual funds over a 10-year period. In the study, 10% of the fund managers were women. They found that female managers take less risk, follow less extreme investment styles (i.e., execute more consistent styles), are less overconfident, and trade less.

Women who are less risk tolerant and trade less tend to balance out men who tend to be aggressive in these areas. For financial advisors, the best practice in working with a male and female couples, any good investment advisor should listen to both parties and attempt to arrive at a risk assessment that reflects a balance between them.

Merrill Lynch Investment Managers completed a study entitled “When It Comes to Investing, Gender Is a Strong Influence on Behavior” that surveyed 500 male and 500 female clients for their attitudes, beliefs, and levels of knowledge on investing. They found that:

  • Women are less likely to hold losing investments too long (35% vs. 47%).

  • Women are less likely to sell a winning investment too quickly (28% vs. 43%).

  • Men are more likely to allocate too much money to one investment (32% vs. 23%).

  • Men are more likely to buy a hot investment without doing research (24% vs. 13%).

  • Men are more likely to trade too much (12% vs. 5%).

In general, men are more susceptible to cognitive biases and women are more susceptible to emotional ones. Men are susceptible to:

  • Overconfidence bias (Cognitive)

  • Loss aversion bias (Emotional)

  • Availability bias (Cognitive)

  • Cognitive dissonance bias (Cognitive)

Women are susceptible to:

  • Endowment bias (Emotional)

  • Status quo bias (Emotional)

  • Representativeness bias (Cognitive)

  • Regret aversion bias (Emotional)

Investor Personality Types

Some large financial firms have conducted studies that classified people as reluctant investors, competitive investors, analytical investors, and so on. Individual advisors, academics, and other researchers have made some interesting correlations between psychological traits and financial behaviour. For example, some personality types have little time or patience for managing money, some start investing too late, and some show more discipline than others.

The Eight Investor Personality Types

There are three investor personality dimensions:

  • Idealism versus Pragmatism (I vs. P)

  • Framing versus Integrating (F vs. N)

  • Reflecting versus Realism (T vs. R)

When we combine the elements of the three dimensions depicted above, there are eight possible investor personality types: IFT, IFR, INT, INR, PFT, PFR, PNT, and PNR.

Idealism versus Pragmatism (I vs. P)

People who fall into the idealist end of the I vs. P spectrum overestimate their investing abilities, display excessive optimism about the capital markets, and do not seek out information that contradicts their views.

Example: Many investors continued buying technology stocks even as they fell during the meltdown in 2000, remaining eternally optimistic that these stocks would make a comeback.

Idealists discern patterns where none exist and believe that their above-average market acumen gives them an exaggerated degree of control over the outcomes of their investments.

Often averse to thorough research, idealists can fall prey to speculative market fads. They can be susceptible to the following biases: overconfidence, optimism, availability, self-attribution, illusion of control, confirmation, recency, and representativeness.

Pragmatists, on the other hand, display a realistic grasp of their own skills and limitations as investors. They are not too overconfident about the capital markets and demonstrate a healthy dose of skepticism regarding their investing abilities. They understand that investing is an undertaking based on probabilities and they do the research to confirm their beliefs. Pragmatists are typically not susceptible to the aforementioned biases.

Framing versus Integrating (F vs. N)

Framers tend to evaluate their investments individually and do not consider how each of them fits into an overall portfolio plan. They are too rigid in their mental approach to analyzing problems. The framer’s portfolio is composed of unique “pots” of money, rather than a combination of well-managed investments.

Example: Framers typically have different allocations for retirement money, vacation money, and university savings. This is not necessarily a bad thing, but framers need to watch for overlap among such allocations to prevent from over-concentrating on one asset class. Framers also subconsciously “anchor” their estimates of market or security price levels, clinging to arbitrary purchase “points”, which leads to bias in future calculations.

They can be susceptible to the following biases: anchoring, conservatism, mental accounting, framing, and ambiguity aversion.

Integrators, on the other hand, are characterized by an ability to contemplate broader contexts and externalities. They correctly view their portfolios as systems whose components can interact and balance one another out.

Integrators understand the correlations between various financial instruments, and structure their portfolios accordingly. They are also flexible in their approach to market and security price levels. Integrators are typically not susceptible to the aforementioned biases.

Reflecting versus Realism (T vs. R)

Extreme Reflectors have difficulty living with the consequences of their decisions and taking action to rectify their behaviours. They justify and rationalize incorrect actions and hesitate to own up to decisions that have not worked out beneficially. They also suffer from decision paralysis because they dread the sensation of regret should they miscalculate.

An example of this type of behaviour is holding inherited securities out of a sense of loyalty to a deceased relative, which may not be a good fit in a diversified portfolio in the current investment environment.

Reflectors may be susceptible to the following biases: cognitive dissonance, loss aversion, endowment, self-control, regret aversion, status quo, and hindsight bias.

Realists, on the other hand, have less trouble coming to terms with the consequences of their choices. They do not tend to scramble for excuses in order to justify incorrect actions, and they assume responsibility for their mistakes. Since realists have an easier time than reflectors in making decisions under pressure, they do not experience regret as acutely and, consequently, do not dread it ahead of time. They are typically not susceptible to the aforementioned biases.

So, did you learn anything about yourself?

You can find Parts 1 and 2, as well as past publications, at

The take-home here is to ensure you have a framework for long-term investing, and to ensure your emotions, biases and heuristics don’t cloud your judgment in sticking to that framework.

If you have any questions about your financial plan, would like our opinion on what this current financial landscape means for long-term investors, or would like a refresh on the framework we have in place for times like these, please never hesitate to reach out.

We are available and accessible to you any time through email, phone, or teleconference (video).

Be well and be safe,


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