generation of insights regarding how people plan and make decisions about their financial future. I recently led an effort to study
the effect of personality on financial decision making — arguing
and demonstrating that personality can indeed explain behaviors
relevant to financial decision making above and beyond what we
know from research on cognitive biases. As part of this effort, we
have identified four distinct personality types based on a combination of two concepts: uncertainty control and social orientation.
Uncertainty control tells us a lot about how people think about
the future. People who are high on uncertainty control tend to
be more confident and optimistic about the future. Conversely,
In terms of social ori-
entation, which tells us
how someone will relate
to their financial advi-
sor, people who are col-
lectively oriented tend to
be quick to build rela-
tionships and trust, while
people who are individualistically oriented are comfortable
expressing disagreement and slow to connect.
How people score in relation to these two concepts tells
us a lot about them. In a recent study, we observed that both
Mediators (low uncertainty control, collective oriented) and
Commanders (high uncertainty control, individualistically
oriented) engaged in the disposition effect, which is a cognitive bias that causes investors to hold onto losing assets while
selling winners, about 50% of the time.
However, Auditors (low uncertainty control, individualistically oriented) engaged in it less frequently at a rate of 21%.
Facilitators (high uncertainty control, socially oriented) tended
to engage in the middle of the two ends at a rate of about 33%.
To summarize, while all groups engaged in the disposition
effect, a cognitive bias, we do see differences in the extent to
which people succumb to this bias (thanks to System 1) that’s
explained by a person’s unique personality.
[Unfortunately, research looking at the effect of personality
on financial decision making is sparse. However, I believe that
looking at personality as a mechanism for explaining financial
decision making is worthwhile, and I will continue to conduct
research in this area.]
In terms of how personality might influence automatic
thinking of System 1, we believe that personality influences
the factors in a situation that people will pay most attention
to, as well as determine how these factors will be perceived.
For instance, someone who is risk averse will gravitate toward
certain factors in a situation and interpret them as threatening.
In contrast, someone who is risk seeking may look at the same
factors positively and be excited by them.
Financial advisors who have insight into the personality of
their clients will have better visibility into their clients’ perspec-
tives (i.e., see things from their point of view) and coach them
accordingly — in other words serve as a proxy for System 2.
It seems almost impossible to browse the internet or read a magazine without coming across an article on the topic of generational
differences, ironically tending to emphasize millennials (born in
the early 1980s to mid-1990s) and stoking the virtually baseless
fears people anticipate of their successor, most commonly labeled
Generation Z (born in the mid-1990s and onward). Consequently,
The short answer is
that generational differences do exist, but quality
research looking at generational differences is
limited. There is also a lot
of misinformation about how each generation is characterized.
Further, the information that is most widely distributed
among the general population is, more often than not, based
on an emotional indictment or defense of a particular generation, conjecture, anecdotes, and case studies (read: not reliable
and valid methodologies). As a result, many of the generational
characterizations are contradictory, which, unfortunately, will
likely begin to undermine the credibility of this research field
as a whole in regard to public opinion and acceptance.
I don’t necessarily fault the people who are interested in
researching and getting a better understanding of this topic.
The reality is that research in this area is limited mainly due
to its difficulty. The most robust insights tend to be informed
by longitudinal studies that track multiple generations over a
period of time — most often several decades.
The challenge here should be obvious. People will inevitably
drop out, research funding gets cut, and researchers die before
their data ever gets analyzed or published (to name a few). To
further complicate matters, much of what we observe is confounded by normal human development. For instance, younger
people, regardless of generation, are typically concerned with
starting careers and families, while older adults will at some
point no doubt be concerned about end-of-life care.
To disentangle these issues, it’s better understand that culture
combined with normal human development gives each individual a unique perspective that in turn influences attitudes and
beliefs (essentially System 1 territory). When observed in the
aggregate, we will tend to see trends that are shared by groups
of people who were born during a similar time — hence the
Financial advisors who have
insight into the personality of their
clients will have better visibility
into their clients’ perspectives and
coach them accordingly.