Clients could see substantial improvements in their returns if they have a better understanding of their risk appetite, personality traits and behavioural biases, according to Dynamic Planner’s Louis Williams.
Behavioural influences on investments has been well documented, but the factors that increase susceptibility to these biases is less well known. 
Williams (pictured), head of psychology & behavioural insights at the financial planning service, said better awareness of behavioural traits that influence investment decisions could prevent future poor financial decisions.
“Behavioural biases can influence risk tolerance levels and impact investment choices,” he said. “However, if advisers can make investors more aware of the powerful biases that can influence their attitudes and behaviour towards financial risk, they can also help them to manage their investment journey in a much more positive way.
“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.”
He added: “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.”
Dynamic Planner’s five personality traits
Source: Dynamic Planner
Below, Williams considers how these characteristics fit with well-known investment behavioural biases as well as how they can be avoided.
Herd mentality – Agreeable and/or introvert personality traits
“This relates to investors basing their decisions on the actions of others,” said Williams. “Whether spurious or intentional herding, both can be detrimental.”
To avoid this kind of behaviour, he said, investors shouldn’t try to time the market, a typical characteristic of herding behaviour.
“Such investors risk making losses and missing out on the highest periods of growth,” Williams explained. “It is therefore best to stay invested and follow the plan.”
Anchoring bias – Conscientious, agreeable and/or introvert personality traits
With anchoring, investors decisions can be influenced by fixating on an “arbitrary or irrelevant” reference point which comparisons and estimations are then based on, said Williams.
He said anchoring can result in the ‘disposition effect’, where subsequent investment decisions are affected by holding onto losing stocks for too long or selling winning ones too early.
“To avoid this, investors must be objective, communicate with their financial planner and make research-based decisions that are less vulnerable to anchoring,” he said.
Overconfidence bias – Extrovert, openness to experience and/or disagreeable personality traits
“Overconfidence can manifest in an overestimation of investment knowledge and result in an underestimated perceived level of risk,” he said. “Investors who are overconfident and overoptimistic may take greater risks.
He added: “It can also be increased by ‘confirmation bias’ – where new information that supports an existing opinion increases confidence.”
To avoid such behaviour, Williams recommended being mindful of the consequences that an overinflated perceived level of skill can have.
Regret aversion – Conscientious and/or emotionally unstable personality traits
“Anticipating regret and envisioning the emotional discomfort of making a poor decision can result in inertia,” said the Dynamic Planner head of psychology & behavioural insights. “Where investors fail to act or stick with a default option for fear of making an active choice which later turns out to be sub-optimal.”
Investors can avoid regret aversion by taking a systematic approach and a diversified portfolio focused on long-term investment goals.
This will help regulate emotions and investors should avoid succumbing to feelings of fear and regret.
Recency bias – Emotionally unstable and/or closed to experience personality traits
Investors with such traits tend to evaluate the likelihood of future events with a short-term perspective, failing to account for the longer-term past, according to Williams.
“This often relates to information that is easily accessible and available which can lead to poor investment choices,” he noted.
Taking a long-term view of investments for long-term investments can help investors avoid this more short-term behaviour, said Williams.