Behavioural finance: What type of investor are you?

  • 'Personality-type’ analysis aims to explain why people behave in the ways they do
  • The Bielard/Biehl/Kaiser model identifies four main investor personalities
  • Which one are you, what are the traps you could fall into, and what could you do to protect yourself?

In this series we have learnt that behavioural finance tries to explain why traditional economic theory doesn’t fit the observed facts. We have also learnt that this is because investors are not perfectly rational. Behavioural finance identifies several traits that prevent us from acting objectively.

These are classified between errors in the way we judge information, and errors in the way that we process that information.

In the fourth article in our series, we will look at the different types of investor, the behavioural finance traps they can fall into, and the steps they could take to help protect themselves from their natural tendencies.

The personality-type approach

‘Personality-type’ analysis aims to explain why people behave in the ways they do by mapping their traits to a set of templates.

Nowadays the concept is associated with the Myers-Briggs personality tests and their variants, which you may have come across aspart of team-building exercises.<.p>

But they stretch all the way back to ancient Greece, to around 400BC and the work of Hippocrates, the father of medicine. He believed that people could be "typed" into four distinct categories based on the four essential bodily fluids: blood, bile, phlegm and black bile.

These fluids, or ‘humours’, demonstrated the qualities of being either warm or cold, and wet or dry. An excess of one or other of them was said to influence both mental and physical health. So people were said to be:

  • cholic(warm and dry)
  • sanguine (warm and wet)
  • melancholic (cold and dry)
  • phlegmatic (cold and wet)

Today, his personality types are most often referred to as Guardians (fact-oriented), Artisans (action-oriented), Idealists (vision-oriented), and Rationalists (theory-oriented).

In behavioural finance, the research of Bielard, Biehl and Kaiser took a four humours approach to position investors along two axes: confidence (warm/cold) and carefulness (wet/dry).

Confident vs anxious

There is a very fine line between being confident in our abilities, and being overconfident and feeling we are better than average. Anxiousness sits at the opposite end of the scale. Some people tend to worry and whilst some manifest it outwardly, others do not.

Just as the confident person thinks that everything will turn out well, the anxious person always thinks that things will turn out badly.

Impetuous vs careful

Impetuous people tend to be more rash and emotional. While it suggests eagerness and enthusiasm, it also signifies little or inadequate forethought; acting first and thinking later.

At the other extreme, careful people tend to over-think and over-analyse any course of action. They prefer to play it safe and as a result careful people tend to rue missed opportunities.

It’s not that black and white

Clearly, being confident, anxious, careful or impetuous are not ‘wrong’ or ‘bad’ except at the extremes.

But understanding how our natural tendencies drive us can help us understand our personal pitfalls as investors.

The four investor types

The Bielard/Biehl/Kaiser model identifies four main investor personalities that they labelled Guardian, Celebrity, Individualist and Adventurer.

We will look at each of these in turn.


Guardians emphasise financial security and preserving the wealth they have worked hard to accumulate, rather than taking risks to grow it further; they take losses very seriously.

They are the type of investor most likely to have a ‘nest egg’, some ‘rainy day’ money, and a pot of money set aside for ‘luxuries’.

They often obsess over short-term performance – both positive and negative – and tend to worry about losing what they have gained previously. This leads them to holding onto failing investments.

Because of this, Guardians frequently deliberate over their decisions and can have difficulty taking action out of concern that they will make the wrong decision or take on too much risk. Instead they prefer to avoid making decisions and sticking to the status quo.

Older investors often demonstrate Guardian behaviours. This is natural. As we age, certainty of cash flow becomes paramount and with it a focus on financial security.

  • Guardians suffer from loss aversion, anchoring and mental accounting.


Celebrities often lack a serious interest in money or investing, or have little aptitude for either, so tend not to have a long-term plan or strategy. They rarely have their own ideas and to compensate follow the lead of friends or colleagues, or whatever general investing fad is popular.

When it comes to investing their biggest fear is that of being left out and frequently regret not taking part in the latest investment fad. But by the time they have heard of it, they usually end up investing at exactly the wrong time, when valuations are at their highest.

Celebrities overestimate the amount of risk they can tolerate and can be attracted to higher-risk ‘sexy’ alternative investmentsand this can make them prey to get-rich-quick schemes.

Unfortunately, they can also be prone to thinking they are more adept or talented than they really are when an investment decision works out, which can lead to unwarranted risk seeking.

Since they don't have their own investment ideas, Followers can react differently when presented with the same investment proposal more than once, but in a different fashion.

  • Celebrities tend to suffer from hindsight bias, regret aversion, representative bias, availability bias, and framing.


Individualists are engaged in financial markets, have original investment ideas and like to get involved in the investment process. They are analytical, methodical, and critical thinkers. They are quietly confident of their abilities and are willing to take risks and act decisively.

They make many of their decisions based on logic. If an investment is new or unusual, they attempt to learn as much as they can. But in their half-ready, full-on pursuit of profits, they may leave some important stones unturned and this can trip them up down the road.

They have a high tolerance to risk, and understand that higher returns come with higher risks. But when their investments go down they don't like to admit that they were wrong, or that they made a mistake.

While they might seek advice, and are often comfortable speaking the language of finance, but they like to remain in control of their investments. And like Celebrities they do not always have a long-term investment plan or strategy; in this case consciously.

  • Individualists suffer from conservatism, availability bias, belief perserverance, representative bias, and hindsight bias.


Adventurers are confident in their investment abilities. They are frequently successful in business and believe these are equivalent skill sets. At their core, they are risk takers and firm believers that whatever path they choose is the correct one. This can lead them to adjust their portfolio holdings frequently in response to short-term market conditions which can be detrimental to long-term performance.

Adventurers believe they can hold their own against the professionals who “are just out to rip me off.”. They are always on the lookout for the next Facebook or Google and dream of catching that one investment opportunity that will make them rich beyond words. When they think they’ve found it, they will not hesitate to make a big big bet on it. But they can struggle with accepting some of the basic principles of investing such as diversification and asset allocation.

They tend to select investments based on how the opportunities they come across resonate with their personal affiliations or values.

Unfortunately, Adventurers can be over confident in their abilities and this can lead them to think they control the outcome of an investment.

Their risk tolerance is quite high and they live for the excitement and the thrill of making the right investing decisions. When successful they enjoy the thrill of winning but when things go wrong, their discomfort can be very high as it represents a blow to their confidence.

  • Adventurers suffer from overconfidence, confirmation bias, hindsight bias, and the illusion of control.

Even machines aren’t infallible

Finally, a word of comfort: the machines don’t get it right all the time either.

Traditional financial theory states that all known information is reflected in the value of an investment and prices only move in response to new news. If this is true then automated trading programs should make perfect investment decisions in the blink of an eye.

But a fake tweet on 23 April 2013 claiming the White House had been bombed and President Obama injured, sent share prices crashing as a network of supercomputers triggered simultaneous sales orders. This overreaction was corrected in about four minutes but it demonstrates a point.

Since then, trading programs have become more sophisticated and artificial intelligence continues to make advances and these kinds of events are few.


At the start of this series we set out to examine why it is that investors are not the rational, objective, investment-picking machines that traditional economic theory presumes. Instead, and as we have discovered, the ways we process and respond to information influence our final decisions.

These behavioural biases are ingrained aspects of our decision-making processes. Personality typing can overgeneralise them and the four profiles illustrated here are extreme caricatures. But if we are honest with ourselves at least one of the above will resonate and make us feel just a little uncomfortable. For whilst broad brush, personality typing can be a useful tool in helping us understand our broader natures and what is important to us.

Behavioural finance holds out the prospect of a better understanding of our behaviour. We are unlikely to find a ‘cure’ for the biases, but by becoming aware of them and their potential effects, we can try to make better investment decisions.

So the first stage of the process is to accept that we might have emotional and cognitive biases. The second is to understandthat these can change over time.

Acting rationally can be hard. But there are two tools that can help. The first is to focus on the process: be logical and methodical. The second is to have an investment plan or strategy and to stick to it: if you see ideas that don’t fit the plan don’t be distracted by them.

Behavioural finance started with Adam Smith, the father of economics, so it is only fitting that we finish with a quote from him:

“If you do not know who you are, the market is an expensive place to find out.”

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