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Helping clients reduce poor investment choices

18 August 2020

Helping clients to understand how their personality traits and behavioural biases impact investment decisions could reduce the likelihood of them making poor investment choices, says Dynamic Planner.

According to the risk profiling company, advisers should work with investors to become more aware of the biases that influence their risk tolerance levels and help them to manage their investment journey in a “more positive way”.

This could be particularly helpful given the recent market volatility and uncertainty, the group said.

Dynamic Planner identified five personality traits; conscientiousness, neuroticism, extraversion, openness to experience and agreeableness, that could be linked with five well-known investment behavioural biases.

Agreeable, conscientious and introvert personality traits were linked to Herd Mentality and Anchoring Bias behaviours.The former describes investors who base their decisions on the actions of others, while the latter centres on investors fixating on a reference point and making comparisons and estimates based on this particular point.

In contrast, extrovert personalities were more likely to display Overconfidence Bias, resulting in them overestimating their investment knowledge and taking greater risks.

Dynamic Planner said emotionally unstable personality traits were more likely to show Regret Aversion, where investors anticipate regret or emotional discomfort at making a poor decision, or Recency Bias behaviour, where investors evaluated the likelihood of future events based on recent memories without putting them in perspective of the longer-term past.

Louis Williams, head of psychology and behavioural insights, Dynamic Planner, said: “Helping clients to have a much deeper understanding of their own personality and attitude to risk can be a great help in overcoming rash or ill-thought-out decision making when it comes to investments, especially when faced with unpredictable markets or a backdrop of uncertainty such as what we have experienced in recent months with the impact of coronavirus and Brexit transition.

“While unlikely to happen, if all investors were able to harness the ability to manage the well-known investment behavioural biases, there would be a directly positive impact on the volatility and fragileness of markets.”

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