Behavioral finance FAQ / Glossary (Investor style)

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Dates of related message(s) in the
Behavioral-Finance group (*):

Year/month, d: developed / discussed,
i: incidental

Style of investing, trading


 


00/10i - 01/5i,9i - 02/8i - 03/9i
- 04/9i - 07/10d - 08/4i
+ see
(investor) profile, personality,
agent-based model, strategy,
psychology, risk attitude,
preferences + eprofile

Is investor profiling taught at Quantico?

And what is your own style?

 Money related activities (investing, trading, borrowing, money

managing) are largely driven by differences among players

in styles , profiles , personalities .


Collective behaviors blur often those differences,
but not fully
.

See also (investor) personality, investor (profile).

Does personality make the investment style?

Does how you invest tells who you are?

Often the term "resonance" expresses
the similitude between:

A person's specific
practices
in managing

its money:

The types of assets
    and operations
it prefers,

Its mode of 
    information
and analysis,

The frequency and
    timing
  of  its operations,

Of course those transactions
    sizes
compared to its

  portfolio size: big
or small slices at a time.

And

 




 

 

 

 

 

That person's basic
psychological
traits
and personality:

(see psychology,
personality...)

For example:
* risk
   attitude,
* impatience vs.
   procrastination,
* optimism vs.
   pessimism,
* under-confidence 
   vs. overconfidence,
* individualism vs.
   empathy,
* short term vs. long
   term horizon
...

Has a person a definite style?


This match is not of course an absolute reality as:

Somebody can have different attitudes (for example towards risk)
    and preferences in different
fields of activities.

Some people might have an appetite for risks in sports but not in
investment, or vice-versa.
Who knows, maybe Napoleon was afraid of small insects.

Somebody can change, or even revert , its preferences

This can happen for example under a shock, or as a delayed response
after an accumulation of external or personal perturbations

Clearly also, the investor situation plays a part in its style.

Although people are not fully conditioned by their (real or
perceived)situation or status, many of those aspects (*)
influence their financial decisions - in a rational way or as a
biased mental
anchoring

(*) age, family, education, origin, country, social /
     professional position, level of wealth and income,
     tax aspects...

List of investment style elements

Collecting building blocks that make the profile.

Spot yours in the warehouse!

Various style elements found in investors (and money

             managers) are listed below

(usually a style combines several behavioral traits).

They start with the most crucial factor: the risk attitude
(see that phrase).

Risk averse investor


 vs.

Risk tolerant investor,
    risk prone investor (risk
    lover)
  

Short term trader

Active (frequent 
   arbitrages) investor

Even hyperactive /
    compulsive trader

(overtrading)

 vs.

 




Long term investor

Passive (buy and hold)
    one

Even procrastinator

 


Trend follower


 

vs.


 

  Contrarian,

Also "buy and hold"
    practitioner,

Or fundamentalist

Value stock investor



 

 

vs.


 



Growth stock investor

Investor in precise
    subcategories
of assets /
    stocks / industries,

See "profile (stock
     types)"

Diversifier

vs.

Stock picker / focuser.

Income investor
   (dividends seeker)

vs.

Capital gain investor


Fundamentalist

(either growth or value
seeker)


vs.



Technicalist (momentum,
     signal follower)

Quant

Behavioralist

Domestic stocks trader


vs.


International diversifier
    or opportunist

Tax avoider


vs.


...Tax enthusiast (???)
       or tax indifferent

Complexity tolerant

vs.

Simplicity lover

Backwards looking

(anchoring, loss aversion,
hindsight bias...)

vs.


Realist / Forward
    looking


Fact digger, doing a lot 
   of homework


vs.



Intuitive investor

(devoting little time
to research)

Educated / experienced
    / informed
investor

vs.


Newbie, amateur,
    dilettante

And so on...


vs.


For example, see below:
      "social segments"

Social differences: genders, social segments...

Investors at the tailor's shop.
Measuring look, size and weight.


Marketing people were the first to identify customer segments and put
those categories in separate boxes so as to apply diversified
strategies.

Those surveys applied to money matters have found differences of investment
attitudes (mostly about risk )
by gender, education, profession, income, wealth, age, nationality, etc.

For example, strong differences have been found
in risk taking between female investors an male
traders, chiefly young ones (see gender).


More "rational" differences are seen also between

* wealthy vs. poor (risk is a different thing for them),

* young vs. old (different time horizons).

Financial counselors and retailers are, obviously, quite interested
in knowing all those psycho-sociological elements, normally in the
interest of their clients.

Well, we hope, as the danger is, not only baiting, or the use
ofstereotypes, but also that some might sincerely  attribute their
own traits and habits to their customers ;-).
(see "projection")

Some financial counselors use specialized psychographic tests to
help their clients find the most appropriate investment strategy.

Effect of styles on markets

The asymmetric war between various styles
might distort market prices.

We have here quite a varied bunch of investors and traders,
each having different effects on the market.

     Some of them might dominate others in certain periods.

Some traders are much more active than others,

Some have much more financial strength
    than   others:

Big hands vs. little hands, institutions vs. the general public, etc.

Here, market structure is at play (see the causes of "anomaly").

Cancelling out distortions  ?

Or distorting things together?

Normally, those diverse styles and individual preferences
would cancel each other and produce an efficient market
where buyers and sellers decisions reach an harmonious
price and return balance.

But the social contamination makes that sometimes
most players bet on the same horses in the same direction.

Here market inefficiency enters the gallop mode.

Operational applications

Stylish finance.

Agent-based models (see that phrase) are software that

try to simulate the decisions of those various categories,

hoping to  make previsions on market evolutions, and
maybe better at predicting disruptions than linear
mathematic models

Also most investment funds adapt their portfolio management to the 
"customer
target" they chose in the above-mentioned
segmentation.

They can also change their asset allocation between the various
styles(they even can change their managers to be sure to change
styles),as some styles are better adapted in some periods
than in others.

Obviously, defensive and contra-cyclical assets
are preferable to cyclical ones if a recession is in sight.

Also hedging practices will differ.

(*) To find those messages: reach that BF group and, once there,
      1) click "messages", 2) enter your query in "search archives".

Members of the Behavioral Finance Group,
please vote on the glossary quality at
BF polls

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This page last update: 16/07/15  


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