By Brad Thomason, CPA
The Myers-Briggs personality test has been around for a long time and has been used in any number of settings to try to explain how people act, and why. Most likely you are at least familiar with it; if not there is no shortage of basic information just a Google search away.
The core idea behind the test, and the related body of research, is that people have certain tendencies which often form a sort of default way of behaving, but not everyone has the same tendencies. Consistent with many earlier systems of categorization, such as ones proposed by Aristotle, Hippocrates and other deep-thinkers down through the years, MB sorts everyone into four quadrants (and further sorts each quadrant into four smaller, more finely-drawn quadrants, to arrive at sixteen archetypal personality profiles). Which quadrant a person falls into provides insight as to preferences they most likely hold. It’s not a firm predictor of behavior from one decision to the next; but it is uncanny just how often people choose, frequently without even realizing it, to act according to the preferences suggested by the model.
So what does this have to do with investing? Sometimes investors do things that don’t really seem logical. I know that comes as a big surprise. When that happens, the obvious question is ‘why?’ Turns out, according to decades of research which has all come to basically identical conclusions, a lot of the time we do it without even realizing it. In this post I’ll highlight just one issue which would seem to be pretty inconsequential, but actually has big implications for how people select and manage the assets in their portfolios.
The degree to which a person has a tendency to be “one of the gang” affects how he/she makes some of the most important investment decisions out there.
If you have ever taken the MB test, you got the results back in the form of a four-letter personality type, where each letter represents one of two possibilities. If you haven’t, I’d encourage you to stop reading for a second and go take a quick online test so you’ll better understand what we’re talking about…
Welcome back. OK, two of the MB quadrants are considered to be focused more on Cooperation, and the other two are more focused on Utility (i.e. what works, in the mechanical, non-personal sense). This idea was advanced and developed by the researcher David Keirsey, whose landmark book Please Understand Me is seen by many as the ultimate expression of these principles, which were popularized earlier in 1900s by Myers and Briggs.
Those who have S and J as the second and fourth letter in their personality type, and those who have N and F as the second and third letter, are more prone to cooperation than SPs and NTs.
SJs cooperate because they have a greater tendency to respect formal authority, the value of tradition, and the need to be active in working to keep the machinery of society healthy. NFs are typically very focused on inter-personal relationships, don’t like conflict, and as such are often hesitant to rock the boat. So even though the rationale is quite different, the action step is the same: follow the crowd.
Here’s what economist Richard Thaler and policy expert Cass Sunstein had to say about that in their book, Nudge:
“sometimes it is rational to follow what others have done, but not always, and when investors travel in herds, they can get into serious trouble.”
In discussing the events and aftermath of the 2008 financial crisis, the economist Robert Shiller had this to say:
“… (the) most important single element (of a boom) is the social contagion of boom thinking, mediated by the common observation of rapidly-rising prices.”
In other words, if no one engaged in crowd-thinking or tribe-following, it would be much harder for asset booms to ever happen. But of course, that kind of behavior is common. So we have boom and bust cycles, from time to time.
In our own work, we have identified a pair of common, and potentially damaging outcomes that seem to be tied to an insistence (even an unconscious one) of going along with what everyone else is doing.
First, because the most common investment allocation in the US is between stocks and bonds, people assume that’s the best option available (despite ample objective evidence, that spans close to a generation at this point, that such is no longer the case), and don’t consider any asset classes outside of the main two.
Second, people get distracted by market behavior, especially when prices are rising, and forget that what’s most important is whether or not their capital is doing what it needs to do, in support of their own individual needs. In other words, whether the market is doing well or not is not nearly as important in personal finance as whether or not your capital is doing the job you need it to do. But because the crowd cares about what the market does, so do individuals who identify as being part of the crowd. Watching one often gets in the way of watching the other.
Hopefully you can see why either of these circumstances would be a cause for concern. And the point here is that some people seem to be more likely to get clipped by these tendencies than others. If your personality type falls into one of the two quadrants mentioned (SJ or NF), be aware of the vulnerability (though it should also be pointed out that folks in the other two quadrants can and do fall into this trap sometimes, too).
Despite the fact that I think there’s merit to the research, and have in fact seen exactly this kind of behavior more times than I can count (usually from people who would be expected to behave this way, based on their personality type…), I understand if you are skeptical. I get it. All of this sounds a little out there. You may not put much stock in psycho-babble, mumbo-jumbo. Which is fine.
But ask yourself this: If you have parts of your portfolio that aren’t doing what you need them to do, what’s keeping you from changing them? Are the reasons of a technical or objective nature? Or is it more a case of “just ‘cause?” If the latter, you may be in the grip of a cognitive bias against what most of your brain tells you is right; especially if you happen to fall into the two Myers-Briggs quadrants most closely associated with cooperative behavior.
When faced with a nagging feeling that something about your portfolio needs to change, you may be resisting what your logic is telling you because you don’t want to be seen as nontraditional, or one who bucks the norm. But it is probably fair to ask, who’s looking? And are these people going to kick in for your retirement if the tribal approach doesn’t go well?
So that being said, knowing where you may be vulnerable has value, in my opinion. And knowing why you are resisting the action that you feel compelled to take, may help you decide that the reason isn’t nearly as important as making the moves to get a portfolio that’s better suited to what you need it to do.
It’s a little embarrassing when we come to a moment of realization that the primary force keeping us from what we want or need to do, is ourselves. But better to be embarrassed for a minute, own up to it, then press ahead, than to ignore the possibility and never delve into the question of why. The good news: if you are the problem, you are in a pretty good position to change that.
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