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Behavioral Finance: Thinking vs. Feeling Clients

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Uncovering Client Tendencies: Thinking vs Feeling

Determining if a client is more aligned with the Thinking or Feeling preference gives advisors two huge pieces of information about how best to work with them.

Justin A. Reckers and Robert A. Simon,

Originally published by www.MorningstarAdvisor.com on August 30th 2012

In our last couple of articles, we began drilling down on the four continua of personality and psychological preferences that underlie the Myers-Briggs Type indicator:

–Extraversion v. Introversion
–Sensing v. Intuition
–Thinking v. Feeling
–Judging v. Perceiving

An individual’s personality will give us vital guidance to the client’s psychological needs, behavioral patterns, and the way in which emotions interact with and interrupt financial decision-making. So far, we have covered the Extroversion vs. Introversion continua and the Sensing vs. Intuition continua. We offered observations of both sides of the continua and uncovered some common biases and barriers that advisors might encounter on the way to economically rational decision-making.

This month we take on the next leg of the Myers-Briggs Type indicator and discuss the Thinking vs. Feeling preference. As an advisor, this overview will help you 1) recognize which side of the ledger your clients occupy and 2) give some ideas and advice as to how you can best work with them and the specific behavioral and cognitive biases they may bring into their financial decision-making.

In previous articles, we presented a brief description of the Thinking individual juxtaposed with the Feeling counterpart and gave a ten thousand foot view of their communication styles and tendencies toward certain economically irrational thought processes. Determining if a client is more aligned with the Thinking or Feeling tendency gives advisors two huge pieces of information about how best to work with them. Stated very simplistically:

1) The Thinking preference is objective in decision-making, placing more weight on facts.

2) The Feeling counterpart is expected to be more subjective and place more weight on personal concerns.

Clients are mostly Thinking or Feeling but are likely to still have traits of the other. A Thinking person may make a decision based on his or her need for objectivity but test the decision for success and soundness with a Feeling style of decision-making. So it would not be accurate to pigeonhole individuals into one classification. Although we will discuss them as two separate categories for purposes of contrast, advisors must avoid the misconception that a Thinking person must be overly intelligent and a Feeling person must be overly emotional.

Thinking
Thinking individuals are likely to be more successful at critical thinking and integrating logic-based data into decision-making processes. They may consider an option and convince themselves it is “irrational,” “illogical,” or “doesn’t make sense.” Following are some brief descriptions of observations common in Thinking clients that can help an advisor recognize their personality preferences.

Observations of a Thinking Client

–Drawn to technical and scientific fields
–Task oriented
–Values fairness
–Decisions happen in the head, not the gut
–Grounded in logical explanations
–Avoids personal interaction in favor of objectivity
–Thinks in terms of pros versus cons

We believe Thinking individuals are inclined to exhibit active, cognitive biases thanks to their preference for logic and thirst for data. Following are some behavioral finance biases we believe should be expected in Thinking personalities:

Aversion to ambiguity. Thinking clients are logical and meticulous in their decision-making. The existence of ambiguity will lead them to seek additional information and avoid options for which missing information makes the probability seem unknown and a pro versus con analysis is not possible.

Empathy gap. A Thinking client’s avoidance of personal interaction in support of their objectivity may leave them prone to a tendency to underestimate the influence or strength of feelings in others. This is especially true in the world of negotiations. The Thinking client will see divorce, probate, and other disputes as logical business deals to be made and miss the emotional components necessary to navigate.

Focusing effect. Our Thinking clients are very prone to the focusing effect as they actively seek data to inform their decision. Their focus will be the data search, which could lead them to place too much importance on one aspect of the decision-making process and cause errors in judgment when they miss other external information, such as emotional issues and the opinions of others.

Feeling
Feeling individuals are likely to be the conflict-avoidant type. They may float around with the hope and confidence that things will be OK and allow that belief to affect their decision-making. They have this confidence because they avoid tough decisions and tough communications. They may genuinely believe restoring harmony to their world after a difficult decision is more important than the outcome and long-term ramifications of the decision itself, leading them to look past the information at hand and the cold hard truth of decision problems.

Observations of a Feeling Client

–Values the opinion of others
–Is able to judge decisions from the point of view of another person
–Justifies decisions based on what they perceive to be best for others
–Caring and warm
–Decisions happen in the gut or the heart, not the head
–Mushy
–May sugar-coat or entirely avoid saying things in the interest of being tactful
–Crowd pleaser

We believe Feeling clients may be more inclined to exhibit emotional or social biases. Following are some behavioral finance biases we believe to be common in Feeling personalities.

Bandwagon effect, herd behavior. One of the pervasive elements of the Feeling personality preference is the desire to maintain harmony. The Feeling individual will look to others and rely heavily on their opinions and points of view to develop their own perspective, making them prone to the bandwagon effect and herd behavior.

Conflict avoidance, loss aversion. Feeling clients prefer to process information and relay their thinking via tactful, conflict-avoidant communication. We believe this to be true thanks to their desire to avoid the social loss they think that conflict represents. For that reason we consider them likely to suffer from loss aversion in their financial decision-making as well.

Planning fallacy. Feeling clients may suffer from planning fallacy because they underestimate the time necessary to complete important tasks. They might show up unprepared for meetings, even meetings with strict agendas and various reminders.

Confirmation bias, ease of information bias. Because Feeling clients have an overwhelming concern for harmony, and a nervousness when it is missing, they can be led to seek out easily available information that confirms preconceived notions in order to restore the social harmony that was lost. This can lead to missing the cold, logical truth.

Next month we will have a more in-depth discussion and application of the Judging v. Perceiving leg of the Myers-Briggs continua.

Justin A. Reckers, CFP, CDFA, AIF is director of financial planning at Pacific Wealth Management www.pacwealth.com and managing director of Pacific Divorce Management, LLC www.pacdivorce.com, in San Diego.

Robert A. Simon, Ph.D. www.dr-simon.com is a forensic psychologist, trial consultant, expert witness, and alternative dispute resolution specialist based in Del Mar, Calif.

Behavioral Finance: Sensing vs. Intuitive Clients

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Sensing Versus Intuitive Clients and Their Financial Decision-Making

Determining if a client is more aligned with the sensing or intuition preference gives advisors two huge pieces of information about how best to work with them.

Justin A. Reckers and Robert A. Simon,

Originally published by www.MorningstarAdvisor.com on July 23rd 2012

In our last couple of articles, we began drilling down on the four continua of personality and psychological preferences that underlie the Myers-Briggs Type Indicator.

–Extraversion v. Introversion
–Sensing v. Intuition
–Thinking v. Feeling
–Judging v. Perceiving

An individual’s personality will give us vital guidance into that client’s psychological needs, behavioral patterns, and the way in which emotions interact with and interrupt financial decision-making.

Last month we reviewed the Extroversion vs. Introversion continua. We offered observations of both extroverts and introverts and uncovered some common biases and barriers they might encounter on the way to economically rational decision-making.

This month we take on the next leg of the Myers-Briggs Type Indicator and discuss the Sensing vs. Intuition preference. This overview will help you as an advisor to recognize which side of the ledger your clients occupy and give some ideas as to how you can best work with them and the specific behavioral and cognitive biases they may bring into their financial decision-making.

In previous articles we briefly outlined the “sensing” individual juxtaposed with the “intuitive” counterpart and gave a ten-thousand-foot view of their communication styles and tendencies toward certain economically irrational thought processes. Determining if a client is more aligned with the sensing or intuition preference gives advisors two huge pieces of information about how best to work with them.

1) How do they learn?
2) How do they perceive the future?

Clients are mostly sensing or intuitive but are likely to still have traits of the other. So it would not be accurate to pigeonhole individuals into one classification. However, we will discuss them as two separate categories for purposes of contrast.

Sensing 
Sensing individuals are attentive and immersed in the sensory intake from every environment they encounter. The individual exhibiting the psychological preferences of a sensing personality will use quotes like “live for today,” “here and now,” and “bottom line.”

Following are some brief descriptions of observations common in sensing clients that can help an advisor recognize an extroverted personality.

Observations of a Sensing Client
–Detail oriented
–Takes mental pictures
–Remembers events based on literal experience
–Concerned with the present
–Occupied by what is actual and tangible
–Trusting of experience
–Pragmatic
–Learns from practical application

We believe sensing individuals to be inclined to exhibit more passive biases. Following are some behavioral finance biases we believe should be expected in sensing personalities along with brief descriptions. The three biases below are different but interrelated, as you will see from the explanations:

Status Quo Bias: Sensing clients are concerned with the present, the here and now, and will have trouble committing to a deliberate conceptualization of the future. Because of this concern for the present, they will exhibit a bias toward the status quo and an aversion to change.

Aversion to Ambiguity: Sensing clients are occupied by what is actual and tangible, and just as they have an aversion to change, they have an aversion to the future. They are preoccupied with understanding the present and sensing the effect of the forces around them in a given moment. They require the details and the availability of current information, so the ambiguity represented by the future may cause them to withdrawal.

Inertia: Sensing client can be very detail oriented and pay so much attention to the current facts that they miss new and different possibilities, which can lead to inertia. The preference for the status quo combined with the heightened awareness of current tangible details will cause the sensing client to miss opportunities for progress.

Intuition 
Intuitive individuals are likely to be more future oriented and more capable of conceptualizing what might be possible. They will also be more skeptical of the future and always be calculating different angles and reading between the lines.

Observations of an Intuitive Client
–Remembers events based on an impression of the experience
–Constantly tries to read between the lines
–Learns by thinking through every angle
–Adventurous
–Trusts gut feelings
–Day dreamer
–Can be scatter-brained, jumping from one place to the other
–Thinks more of the future than the past

We believe intuitive clients may be more inclined to exhibit active biases. Following are some behavioral finance biases we believe to be common in intuitive personalities, with brief descriptions.

Analysis Paralysis: Intuitive individuals are always seeking deeper meanings in situations. In divorce negotiations, for instance, we commonly see intuitive clients balk at financial settlements offered them without consideration. The common reasoning is, “if my former spouse is offering it to me, it must not be a good deal.” The intuitive client may look for hidden meanings and wind up allowing a feeling that things are too good to be true hijack decision-making.

Framing Effect: Intuitive people remember events and learn based on impressions. In the case of a memorable event, they may associate a feeling or a thought they had in the middle of the memory. They are constantly looking at all angles and seeking a different frame of reference for the memory or the learning experience. Because of this, they may be prone to framing effect or the tendency for people to draw different conclusions based on how data is presented. This includes the tendency to ignore that a solution exists, because the source is seen as an “enemy” or as “inferior” (see above).

Optimism Bias: Because intuitive individuals tend to trust their gut feelings, they may believe they are less at risk of experiencing a negative outcome. They simply believe the gut feeling they have based on their own knowledge and experience is the best resource to rely upon–which can lead to unrealistic optimism.

Next month we will have a more in-depth discussion and application of the Thinking vs. Feeling leg of the Myers-Briggs continua.

Justin A. Reckers, CFP, CDFA, AIF is director of financial planning at Pacific Wealth Management www.pacwealth.com and managing director of Pacific Divorce Management, LLC www.pacdivorce.com, in San Diego.

Robert A. Simon, Ph.D. www.dr-simon.com is a forensic psychologist, trial consultant, expert witness, and alternative dispute resolution specialist based in Del Mar, Calif.

Behavioral Finance: Extroverted vs. Introverted Clients

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Extroverted Versus Introverted Clients and Their Financial Decision-Making

If advisors can recognize which side of the ledger a client occupies, they can better address the specific behavioral and cognitive biases he may bring to financial decisions.

Justin A. Reckers and Robert A. Simon,

Originally published by www.MorningstarAdvisor.com on June 28th 2012

In our last article, we began drilling down on the four continua of personality that underlie the Myers-Briggs type indicator:

  • Extraversion v. Introversion
  • Sensing v. Intuition
  • Thinking v. Feeling
  • Judging v. Perceiving

An individual’s personality will give us vital guidance to that client’s psychological needs, behavioral patterns, and the way in which emotion interacts with the individual’s thought processes. Over the next few articles, we will take each of the four continua and individually drill down to provide ways that advisors might recognize which side of the ledger their clients occupy, and also give some ideas and advice as to how advisors can best work with clients and the specific behavioral and cognitive biases they may bring into their financial decision-making.

In previous articles we have given brief descriptions of the extroverted individual juxtaposed with the introverted counterpart, and offered a 10,000-foot view of their communication styles and tendencies toward certain economically irrational thought processes. It’s important to remember that even though clients are mostly introverted or extroverted, they are likely to still have traits of the other. So it would not be accurate to pigeonhole individuals into one classification. For instance, levels of comfort or security in specific situations and environments may help to fashion a person into an extrovert in comfortable, family-oriented situations, and an introvert in less-comfortable business meetings or social engagements.

Extroverts
Extroverts are often gregarious, confident, and prone to positive thinking. The extroverted individual would be outgoing and relatively less inhibited in interactions with others.

Following are some brief descriptions of observations common in extroverts that can help an advisor recognize an extroverted personality.

Observations of Extroverts
–Outgoing and friendly in social situations
–Self-confident
–Lovers of crowds, upbeat music, and community events
–Maintain large groups of marginal relationships but may have few close relationships
–Driven to sales and leadership positions in career choices
–Derive energy from others
–Good communicators
–More likely to engage in delinquent behavior as a child
–Generally self-classify as happy more frequently than introverted personalities
–More prone to react to pleasant events
–Better able to think positively in the midst of negative information or ambiguity

We believe extroverts to be inclined to exhibit active/emotional biases. Following are some behavioral finance biases we think should be expected in extroverted personalities:

Overconfidence Bias: Extroverts’ tendency toward self-confidence and need to exhibit this self confidence to manage social and business situations may lead to overconfidence. In situations where extroverts consider themselves to be well informed and socially positioned, they may believe so strongly in their own ability or knowledge that they will refuse to accept the input of others. The reason for their refusal might be the risk of taking a hit to their self-confidence should they be proven wrong.

Illusion of Control Bias: This bias may play into the extrovert’s love of crowds and community events. They are more prone to being swept into the joy of the masses. They will derive energy from the crowd. Extroverts’ self-confidence and illusion of controlling the situation are a large part of what allow them to be comfortable in crowds when introverts would be made nervous by their perceived lack of control.

Bandwagon Bias: Extroverts have a need for social interaction and thrive in social environments. For this reason we believe it more likely for them to exhibit a bias toward the social crowd, making them more prone to crowd behavior. They probably can’t help but chat up their office mates or cocktail buddies about their market performance. When they hear the consensus of the crowd, they may follow in order to avoid upsetting the social order.

Introverts
More introverted individuals can be shy, inhibited, and have tendencies toward self-doubt and reliance on others.

Observations of Introverts
–Self-conscious, often wondering whether they fit in or are doing things right
–Nervous
–Close to the vest
–More focused and able to maintain focus in social situations and over longer periods of time
–Shy in new or uncertain situations
–Tend toward private reflection instead of public discussion in decision-making processes
–Take their time to think deeply and reflect internally; you say they think before they act
–Get their energy from within rather than feeding off of others like an extrovert will; they may even find groups of people to be emotionally and physically draining
–They enjoy alone time and need it to refuel after stressful or nerve-wracking social encounters
–Some studies suggest introverted personalities are strongly correlated with “gifted” intellect
–Careers such as academics and computer programming
–More prone to react to negativity and see ambiguity as negative

We believe introverts may be more inclined to exhibit passive biases. Following are some behavioral finance biases we believe to be common in introverted personalities:

Aversion to Ambiguity: Introverts are prone to negative reactions in the midst of ambiguity, and this negative reaction can often lead to a barrier in financial decision-making known as the Aversion to Ambiguity. They may see the presence of ambiguity as a negative and avoid any decision or decision-making problem that requires them to recognize its presence.

Status Quo Bias: Because introverts tend to be more inward looking and feeling, they may prefer the status quo over possible change. It may be hard for them to convince themselves that they have the strength necessary to survive the changes.

Decision Fatigue: Introverts need to have inward reflection time and alone time. They are unlikely to be easily engaged in large strategy meetings and may need to take long conversations in chunks in order to be sure they have the time to internalize the issues and process the decision problem.

Next month we will have a more in-depth discussion and application of the Sensing vs. Intuition leg of the Myers-Briggs continua.

Justin A. Reckers, CFP, CDFA, AIF is director of financial planning at Pacific Wealth Management www.pacwealth.com and managing director of Pacific Divorce Management, LLC www.pacdivorce.com, in San Diego.

Robert A. Simon, Ph.D. www.dr-simon.com is a forensic psychologist, trial consultant, expert witness, and alternative dispute resolution specialist based in Del Mar, Calif.

Behavioral Finance: Client Personalities and Behavioral Bias in Financial Decision-Making

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Client Personalities and Behavioral Bias

Identifying your clients’ personality-related biases can help you maintain a successful and productive professional relationship.

Justin A. Reckers and Robert A. Simon,

Originally published by www.MorningstarAdvisor.com on May 17th 2012

In our last article, we discussed the concept of personality and what personality is. We described personality as the “consistent, enduring, predictable manner of behaving, experiencing, and interacting with others and with the world.”

We described how, when forming relationships with clients and establishing trust and rapport, it is important to be aware of the client’s personality. This is because an individual’s personality will give us vital guidance to his or her psychological needs, behavioral patterns, and the way in which emotion interacts with that individual’s cognitive activity (thinking).

By having insight into these aspects of a client, you will be more likely to establish and maintain a successful and productive professional relationship that allows you to succeed. Knowing your client’s personality style can help you identify the cognitive distortions that are most likely at play for the individual. And, as we’ve been stating, knowing the distortions gives you insight into the “client mind.”

In our previous article, we described several different conceptual systems for classifying personality. So let us return to the four continua of personality that underlie the Myers-Briggs Type Indicator:

–Extraversion v. Introversion
–Sensing v. Intuition
–Thinking v. Feeling
–Judging v. Perceiving

(Note: There are no automatic applications of a particular Myers-Briggs type to the cognitive biases we have discussed. The following discussion is intended to illustrate ways in which you can begin to hypothesize which biases are most likely to be observed in a client. Of course, actual experience/interactions with your client will give you the information that will make you able to more accurately assess the biases that operate in a given client.)

Individuals occupying a more extroverted position would be outgoing and relatively less inhibited in their interactions with others. Such individuals are often gregarious and confident and prone to believing in themselves–at times overly so. These individuals may be using active/emotional biases such as the Overconfidence Bias and the Illusion of Control Bias. These clients may be the ones who remind you they are smart enough to do your job and rationalize they need your help because they just don’t have the time with all of the other important things on their plate.

On the other hand, more introverted individuals can be shy and inhibited, and may have tendencies toward self-doubt and reliance on others. You might hypothesize that such individuals are more prone to use the Status Quo Bias or the Framing Effect. These clients will thank you every time you pick up the phone to call with an update or send them an e-mail. These individuals appreciate knowing that you are thinking about them but may not pick up the phone to make sure you are.

Another Myers-Briggs continuum is that of Thinking v. Feeling. Those on the thinking end of the continuum emphasize cognitive, intellectual, objective information when it comes to decision-making. Those on the feeling end of the continuum emphasize emotional, subjective information when it comes to decision-making. With this in mind, it is possible to understand how those on the thinking side of the ledger would tend to cognitive distortions that emphasize “thinking” types of data, such as the Ease of Information Bias, Confirmatory Bias, or the Overconfidence Bias.

On the other hand, those that find themselves on the feeling side of the ledger tend to rely upon subjective and emotionally driven biases such as the Optimism Bias, Framing Effect, and Live for Today Bias. The Cognitive Dissonance Bias, when operating, will drive the “thinkers” to ignore the emotional data that they perceive, whereas it will drive the “feelers” to ignore the factual/cognitive data they perceive. A thinking client might be the one who always strikes up conversations with friends about money hoping to get little insights and ideas, while the feeling client will fear that conversation for the anxiety it may provoke.

Turning to the Five Factor Model of personality discussed in our last article, let’s explore the Conscientiousness Factor, which has efficient/organized on one end of the continuum and easygoing/careless on the other end. Clients who fall toward the efficient/organized end of the continuum might be conceptualized as having a tendency toward the Illusion of Control Bias. This may be because individuals who are highly organized and efficient tend to see this attribute as a way of mastering their surroundings and achieving a certain measure of control over their world. On the other hand, those who are easygoing and careless might be thought of as individuals who are less likely to plan or think ahead. Thus, one might hypothesize that these individuals would be more likely to display a Live For Today Bias or even an Optimism Bias.

Finally, let us turn to look at the personality disorders that we also discussed in our last article. We explained that when personality styles and tendencies become rigid, inflexible, and maladaptive–when they become unable to flex and adapt to the demands of the situation or the task at hand–the personality style moves into the realm of a personality disorder.

Personality disorders tend to be relatively fixed and rigid styles that, because of their rigidity, interfere with good psychosocial functioning and adaptation. An individual exhibiting signs of a Cluster B personality disorder (which features emotional or erratic behavior) might be more likely to present with a Self-fulfilling Prophecy Bias or an Overconfidence Bias. Individuals who present with Cluster C personality disorders (which feature anxious and fearful behavior) might be likely to demonstrate a Status Quo Bias or Cognitive Myopia.

Of course, there is no known way of being able to predict with a reasonable degree of certainty what bias a client may have, given their personality style or given the presence of a personality disorder. Although these systems are good at classifying groups of people conceptually, each individual is unique and must be assessed and understood on their own terms and in the context of their needs, their strengths and weaknesses, their life stage, and so forth. We want to emphasize that we do not propose a simple formula by which to identify the biases that individuals may present. At the outset of the relationship with a client, the skilled advisor will seek to understand the client and, therefore, the biases that the client presents.

We hope that the examples illustrated in this article will give you a starting place to begin your successful search for your client’s biases, which will, in turn, give you clues as to how best to interact with and meet the needs of your client. We will see you next month to continue our discussion of how your clients’ personality types come into the room during financial decision-making.

Justin A. Reckers, CFP, CDFA, AIF is director of financial planning at Pacific Wealth Management www.pacwealth.com and managing director of Pacific Divorce Management, LLC www.pacdivorce.com, in San Diego.

Robert A. Simon, Ph.D. www.dr-simon.com is a forensic psychologist, trial consultant, expert witness, and alternative dispute resolution specialist based in Del Mar, Calif.

Personality and Finance

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Personality and Finance

Learn how personality is defined and the different personality types you may encounter among your financial advisory’s clients.

Justin A. Reckers and Robert A. Simon,

Originally published by www.MorningstarAdvisor.com on April 19th 2012

In our next two columns, we are going to dive into personality–including personality types and when personality styles become problematic and maladaptive. We will relate how you, the advisor, might need to take different approaches for clients with different personality styles, including how you establish rapport and develop relationships with your clients. We’ll cover what personality might indicate about the client’s risk tolerance and needs with regard to investments and planning, and what kinds of cognitive distortions might be found in particular personality styles.

Personality is best thought of as an individual’s consistent, enduring, predictable manner of behaving, experiencing, and interacting with others and with the world. For example, some people are fundamentally emotional in their orientation, whereas others are more intellectual/cognitive. Some people are organized in their orientation, whereas others are disorganized or even chaotic.

There are numerous conceptual systems for understanding personality. Often, how personality is classified depends on the reason for the classification. For example, in the business world, the Myers-Briggs Type Indicator is a commonly used test that classifies personality types. This test, which many believe is particularly helpful in constructing work teams and in understanding how employees interact within the work environment, evolved from Carl Jung’s theory of types. Myers-Briggs classifies individuals along four continua:

–Extraversion v. Introversion
–Sensing v. Intuition
–Thinking v. Feeling
–Judging v. Perceiving

The Five Factor Model of personality developed by Costa & McCrae emphasizes the following personality traits (factors):

–Openness to Experience (inventive/curious v. consistent/cautious)
–Conscientiousness (efficient/organized v. easygoing/careless)
–Extraversion (outgoing/energetic v. solitary/reserved)
–Agreeableness (friendly/compassionate v. cold/unkind)
–Neuroticism (sensitive/nervous v. secure/confident)

In systems such as the Myers-Briggs or the Five Factor Model, individuals are characterized on each of the dimensions, resulting in a multifaceted conceptualization of their personality. In such systems, there is no such thing as a “normal” or “ideal” personality. Instead, personality is seen as a consistent set of behaviors and attitudes.

Further, each personality style or type brings with it a set of strengths and a set of weaknesses. For example, a person who is inventive/careless/reserved might be a creative type who thinks outside the box but may also be shy and hesitant. Such an individual might be well suited to work in a creative environment where interactions with teams of people are not frequently necessary.

On the other hand, an individual who is consistent/compassionate/sensitive might tend to rely on structure, strive to please others, and seek the approval of others. Such an individual might not be suited to take on important leadership roles in the workplace but can be called upon to support and assist co-workers, especially when they are struggling.

As you can see, both of these hypothetical personality types, while very different, have positive aspects that serve the person well in different types of situations.

When personality styles and tendencies become rigid, inflexible, unable to adapt to the demands of the situation or the task at hand, the personality style moves into the realm of a personality disorder. The Diagnostic and Statistical Manual of Mental Disorders–IV TR (DSM-IV TR) is the manual used by mental health professionals to diagnose individuals whose personality traits have become maladaptive. Within the DSM-IV TR, there are three clusters of Personality Disorders:

Cluster A: Odd or Eccentric Behaviors

–Schizoid Personality Disorder
–Paranoid Personality Disorder
–Schizotypal Personality Disorder

Cluster B: Dramatic, Emotional or Erratic Behaviors

–Antisocial Personality Disorder
–Borderline Personality Disorder
–Narcissistic Personality Disorder
–Histrionic Personality Disorder

Cluster C: Anxious, Fearful Behaviors

–Avoidant Personality Disorder
–Dependent Personality Disorder
–Obsessive-Compulsive Personality Disorder

Again, a personality disorder is observed when someone’s personality style is so extreme, fixed, or rigid as to cause maladaptive behaviors. An individual who is very orderly, organized, and neat and who prefers a life that is predictable and routinized may have an obsessive-compulsive personality style. This individual can thrive in structured environments, will reliably keep on task and stick to the timeline when it comes to completing projects, and is likely to be the one who reminds others of project deadlines and who can bring a predictable structure to critical project requirements. These traits and behaviors are positive and adaptive. When something unexpected happens, this individual may be temporarily sidetracked but will use his or her personality traits to accommodate the unexpected events and will get back on task.

However, individuals with an obsessive-compulsive personality disorder have such an extreme need for order and predictability that it gets in the way of creativity, impairs their ability to take in and consider alternative points of view, and if something unexpected happens, they may fall apart and be unable to readily navigate hurdles and get themselves back on task.

In our next article, we will apply personality types and styles to the needs of your clients. For instance, consider this: A client whose orientation is primarily within Cluster C above is likely to approach planning from a cautious, fear-based point of view. You can assist such clients by giving them information, patiently and methodically answering their questions, and acknowledging that their primary financial-planning concern is preserving their asset base by minimizing losses.

On the other hand, an individual whose orientation is primarily from Cluster B will be more emotion driven, will utilize linear/rational information to a lesser degree, and may approach investing in a way that feels more exciting and fun.

Justin A. Reckers, CFP, CDFA, AIF is director of financial planning at Pacific Wealth Management www.pacwealth.com and managing director of Pacific Divorce Management, LLC www.pacdivorce.com, in San Diego.

Robert A. Simon, Ph.D. www.dr-simon.com is a forensic psychologist, trial consultant, expert witness, and alternative dispute resolution specialist based in Del Mar, Calif.

Client Money Personalities: The Entrepreneur

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Client Money Personalities: The ‘Entrepreneur’

Overconfidence is a common personality trait exhibited by advisors’ entrepreneurial clients.

Justin A. Reckers and Robert A. Simon,

Originally published by www.MorningstarAdvisor.com on March 22nd 2012

We ended last month with some talking points to help advisors begin to understand the money personalities of their clients. To continue the conversation, we want to give some examples of typical discussions you might have with clients and the underlying personality features that might be coloring their decision-making.

The Entrepreneur

We all know an entrepreneur. Maybe a brother-in-law, maybe a neighbor, maybe a client. So what makes them tick? Is it ambition, creativity, perseverance, a dislike for taking orders from a boss, or perhaps a penchant for taking risks? More importantly, can you as an advisor recognize these personality traits and better understand your client? And can you understand how this money personality impacts your client’s investing goals and preferred approach to investing?

Many of the advisors reading this article probably consider themselves entrepreneurs. The majority of you are responsible for creating new business or got to where you are by having generated new business at some point in your career. What can you learn from your own personality? (The authors think of themselves as entrepreneurs because we are independent, self-employed, and self-directed–we establish goals and chart a path to achieve them.)

In conversations with entrepreneur clients we have learned that what motivates someone to be entrepreneurial and to accomplish ambitious goals is multi-determined, complex, and individual. We asked some clients why they thought they had become entrepreneurs. A biotech entrepreneur told us, “I had such a great idea that I couldn’t let it go, and no one else would listen so I had to do it myself.” A serial technology entrepreneur told us, “I don’t really know. I think I was left without a job at one point in my life. Faced with the possibility that I may not be able to feed my family I had to do something. Luckily I had an idea and wouldn’t take ‘no’ for an answer.” A CEO for hire in the start-up world told us, “I probably have attention deficit disorder because I come into ideas and opportunities with a limit to how long I will spend on something before moving on. That means I am constantly getting involved in new and different endeavors.” A successful attorney who built a large firm told us, “I wanted to practice law my way and the only way to do that was to strike out on my own.”

We do believe there are some common characteristics of entrepreneurs. One of them is overconfidence. The most endearing part of overconfidence is that it makes entrepreneurs very confident in their inventions, ideas, and decisions. They don’t take ‘no’ for an answer, and they stay motivated when things are difficult. They tend to see what is working versus what is not working. But that also means they make economically irrational decisions on a regular and consistent basis!

Interestingly, overconfident clients are often procrastinators. Although this may at first seem unexpected, overconfident people tend to procrastinate on current matters in favor of future opportunity. Thus, advisors must teach these clients the concept of how paying themselves first is a giant step in their financial planning and wealth accumulation. This is because such individuals’ overconfidence makes them unrealistically sure of their ability to keep generating flow. This leads them to think of how to make the next dollar rather than how to keep and grow the dollar they already have.

Entrepreneurs are often affected by a flaw in their planning skills that leads them to underestimate the time necessary to complete tasks. This, in turn, may prompt them to label such tasks as unimportant and, therefore, it is less likely that the task(s) will be completed. Whether rational or not, the mindset is consistently focused on the future because the entrepreneur is driven by the future, by opportunity and by risk taking.

Entrepreneurial personalities are often plagued by cognitive errors caused by the illusion of control and subsequent problems created by such individuals taking on escalating commitments. The illusion of control colors the decision-making of overconfident clients as they believe they have more control over a situation or variables than could rationally be explained.

The biggest struggles you will have with overconfident clients will be those where they really need to accept and act on your advice when it is counter to their own gut feeling. Overconfident clients may believe they are smart enough to do your job and rationalize their seeking your advice based on simply not having enough time to do it themselves.

Noted psychologist Daniel Kahneman said, “Overconfident professionals sincerely believe they have expertise, act as experts and look like experts. You will have to struggle to remind yourself that they may be in the grip of an illusion.”

So how do you know when a client may be suffering from overconfidence bias? Conversation topics should include:

–How did the client acquire their wealth?

–How realistically difficult was it for them to acquire the wealth? Have they risked their own capital to attain greater wealth?

–Has the client regularly sought the guidance of trusted experts?

–Do they often underestimate the amount of time or effort necessary to complete tasks?

Overconfidence is just one of many personality characteristics we encounter in financial decision-making. The exact combination of characteristics or qualities that form an individual’s distinctive character as a successful entrepreneur remain elusive, but we do know some tell-tale signs.

A client’s overconfident, entrepreneurial personality is the fundamental template through which they view the world. It affects risk aversion and complicates financial decision-making. If you, as an advisor, better understand the template they are working from, you can better guide them through the decision-making that will help them pay themselves first and take advantage of the opportunity their ambition and perseverance offers.

Next month, we will continue discussing common personality traits and guiding you through the process of uncovering them.

Justin A. Reckers, CFP, CDFA, AIF is director of financial planning at Pacific Wealth Management and managing director of Pacific Divorce Management, in San Diego.

Robert A. Simon, Ph.D. www.dr-simon.com is a forensic psychologist, trial consultant, expert witness, and alternative dispute resolution specialist based in Del Mar, Calif.

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