Psychographic models 1

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En provenance du cours de Indian School of Business

Behavioral Investing

87 notes

Indian School of Business

Behavioral Investing

87 notes

Cours 3 sur 5 dans Specialization Financial Markets and Investment Strategy

Through this course, you will learn how individuals and firms make financial decisions, and how those decisions might deviate from those predicted by traditional financial or economic theory. We will explore the nature of these biases and their origins, using insights from psychology, neurosciences and experimental economics on how the human mind works. From these biases, you will be able to examine how the insights of behavioral finance complement the traditional finance paradigm. We also look at the micro and macro biases. Finally, we will explore how these insights describe more complicated topics such as fat tail events and financial crises.

À partir de la leçon

Psychographic models in Finance

This module discusses the 3 psychographic models in behavioral finance. After finishing this module you will be able to explain the three psychographic models and differentiate between them.

Psychographic models 19:13

Psychographic models 212:11

Psychographic models 317:44

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Vaidya Nathan
Lecturer
Finance

[MUSIC]

Learning outcomes, after completing this video you will be able to explain

what manual two way model is.

Distinguish between passive investors and active investors.

We'll now look at psychographic models,

which can help you understand your own behavior.

And be able to understand the tendencies and the characteristics,

and the behaviors that you are likely to exhibit while investing.

We look at three psychographic models.

First we look at the Barnewall model,

which is essentially along just two dimensions.

The two dimensions are basically active investment active and passive investments.

Then we look what is called the BB & K model in the next lecture.

There we will essentially slot investors or classify investors or

typograph investors along two different dimensions.

So we look at they'll be two dimensionality, so

four types of investors.

First move from active-passive, which is just two types to four types.

And then I'll have my own model,

which is basically along three different classifications.

And so there are eight different personality types or

behaviors that investors exhibit.

And what I'll do is finally in the third lecture, when I put forth my own model of

classifying investors along eight different types.

I'll essentially match those eight different classes of investors and

map that to the biases that we have discussed so far.

And that will be the final lecture for the course, and then we'll conclude.

So let me talk a little bit about psychographic models and

the psychographic classifications.

Now psychographic classifications are relevant with regard

to individual investors strategy and risk tolerance.

You can essentially look at the investor's background.

His or her past experience and then you can use that to map the kind of decisions

that they are likely to make in the investment management process.

Or how they would basically go about the asset allocation process is

something that you can infer by looking at the background behavior and tendencies.

So you can slot investors, classify investors based on that.

So if investors fit a particular specific psychographic profile,

they're mostly likely to exhibit those kind of specific investor behavior.

And because they're more likely to invest those kind of behavior,

we can essentially attempt to recognize the relevant

revealing behavioral tendencies that they're likely to have.

And that can help you to make informed investment decisions.

Both for yourself if you're the investor yourself or if you're advising,

if you're a financial advisor, you can help your client know and

infer some of the behavioral tendencies that they like you to have.

So hopefully, after you have inferred that and you're aware of that

that might basically help you do better investment decisions and

get probably yield in better investments outcomes.

So the first model is what is called as the Barnewall two-way model.

It's one of the oldest model and the most prevalent psychographic

investor model that's based on the work of Madelyn Barnewall.

And this was intended to help investment advisors interface better and

understand their clients better.

So Barnewall distinguished between two relatively very simple investor types,

passive investors and active investors.

So passive investors are defined as those investors who have become

wealthy passively.

For example, they may have become wealthy by inheritance or

by risking the capital of others rather than investing their own capital.

So passive investors have a greater need for

security than they have tolerance for risk.

And also their own occupation tends to have an effect on the kind

of investments that you do.

So passive investors think your occupational groups can tend to

make you a passive investor and active investor.

And typically passive investors include the different

occupations like corporate executors,

lawyers with very large regional firms, accountants,

medical and dental professionals, non surgeon status.

Surgeons tend to have higher risk tolerance,

individuals who have inherited wealth.

Small business owners who have again inherited the business, journalists,

school teachers, and even people who working as surprisingly also people

who are also I guess they are tellers in banks they have very low risk tolerance.

So typically the smaller economic resource the investor has the more likely

the person is likely to be a passive investor.

The lack of resources kind of gives individuals

a higher security need and therefore a lower tolerance for risk.

So a large percentage of the lower and

middle social income classes tend to fall in this category of passive investors.

Active investors on the other hand can be defined

are typically those individuals who have

earned their wealth in their own lifetimes by their own skill, effort, and so on.

So they have been actively involved in wealth creation, and they at some point of

time would have risked their own capital in achieving their wealth objectives.

So therefore they tend to have a much higher risk tolerance.

So [COUGH] they basically have a higher risk tolerance and

therefore their need for security is that much lower.

Now related to their high risk tolerance is the fact that

active investors prefer to maintain control of their own investments.

They're the guys who like to be in control and

they become involved in an aggressive investment

of which they're not in control, their risk tolerance tends to drop, quickly.

So in some sense the fact that they're in control tends to increase their

risk tolerance.

And the reason why their risk tolerance is higher is because they tend to believe in

themselves, because these are mostly self made people who made their wealth in

their own lifetimes, through their own effort and skill.

And they get very involved in their own investments up to the point that

they gather a lot of information.

Do a lot of research about the investments and

tend to drive their own investment advisors crazy.

So if you've ever been an investment advisor to an active investor,

chances are he or she will be driving you crazy by giving you so

much information with his or her own research, so much of research.

And they tend to know a lot more than the investment advisor themselves.

Now by their involvement and control,

they feel that they have reduced the risk to an acceptable level,

which may not be the case, which again may not be the case.

So you as an advisor may have to basically caution them, and

essentially make them aware that doing research or

being in control doesn't necessarily mean that you have reduced the risk.

But we just want the active investor tends to feel.

So psychographic models are essentially models which can help you as if

you're an investment advisor or

if you're a new investor yourself to map your investment behavior.

So it's a fairly simple, non invasive way of looking at

the personal history or the career record of a person.

And that can give you a lot of information about the likely way in which go

about their investments.

And this can also signal potential pitfalls that can happen and

therefore can guard you against establishing.

If you're a financial advisor, it can help you establish

a very good to an advisor-client relationship.

If you are an investor yourself,

that can help you guard against some of those pitfalls.

So very quick biographic glance of a client or

a quick introspection of yourself.

Can provide you some important context for portfolio design.

[MUSIC]

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