Module 4: Introduction To Personality Theory PDF

Module 4: Introduction to Personality Theory FME211 Personality Theory  People are unpredictable, varied, and have a mix of traits that don't always provide us with a full understanding of why people make the behavioral decisions that they make generally and how financial decisions are m...

Module 4: Introduction to Personality Theory FME211 Personality Theory  People are unpredictable, varied, and have a mix of traits that don't always provide us with a full understanding of why people make the behavioral decisions that they make generally and how financial decisions are made, in particular. HISTORY OF PERSONALITY THEORY Personality is made up of the characteristics, patterns of thoughts, feelings, and behaviors that make a person unique. In addition to this, personality arises from within the individual and remains fairly consistent throughout life. Fundamental Characteristics of Personality Consistency: There is generally a recognizable order and regularity to behaviors. Essentially, people act in the same ways or similar ways in a variety of situations. Psychological and physiological traits: Personality is a psychological construct, but research suggests that it is also influenced by biological processes and needs. Impact on behaviors and actions: Personality does not just influence how we move and respond in our environment; it also causes us to act in certain ways. Multiple expressions: Personality is displayed in more than just behavior. It can also be seen in our thoughts, feelings, close relationships, and other social interactions.  Hippocrates The great physician believed that people could be “typed” into four distinct categories named Melancholic (sad), Sanguine(enthusiastic), Choleric(active), and Phlegmatic (calm).  Guardians: Fact-oriented  Artisans: Action-oriented  Idealists: Ideal-oriented  Rationalists: Theory-oriented  Plato In Plato's view, the soul has an appetitive part, a spirited part, and a rational part: The appetitive part controls desires for the most basic needs of the body, such as food and drink. The rational or thinking part of the soul controls our capacity for rational calculation and problem solving. The rational part tries to keep the appetitive part in check. The spirited part disciplines either the appetitive or rational part when one of the two gets the better of the other.  FOUR MAIN PERSONALITY THEORIES Different schools of thought in psychology influence many of these theories, and some of these major perspectives on personality include: trait theories, behavioral theories, humanist theories, and psychodynamic theories. Trait-Based Theory The trait theory of personality suggests that people have certain basic traits and it is the strength and intensity of those traits that account for personality differences. Trait theorists are primarily interested in the measurement of traits, which can be defined as habitual patterns of behaviour, thought, and emotion Trait-Based Theory: Raymond Cattell Cattell has a formula for expressing his position: R = f(S × P). In this equation, R= is the “nature and magnitude of a person's behavioral response … what he [or she] says, thinks, or does” and is a function of both S, =the “stimulus situation in which [the person] is placed” and P,= which stands for the nature of the person's personality. Trait-Based Theory: Raymond Cattell 1. Cattell thought that a personality trait is “a permanent entity that does not fade in and out like a state; it is inborn or develops during the life course and regularly directs behavior.” 2. A common trait is “A trait which can be measured for all people by the same battery [of tests] and on which [the people] differ in degree rather than in form.” (ex. openness, extravert, neuroticism, intellegence) 3. A unique trait is “so specific to an individual that no one else could be scored on its dimension.” 4. Surface traits are very obvious and can be easily identified by other people, whereas source traits are less visible to other people and appear to underlie several different aspects of behavior. Trait-Based Theory: Eysenck: “Off the Top of the Head” Theorizing Traits, as defined by Eysenck, are: “theoretical constructs based on observed intercorrelations between a number of different habitual responses.” Eysenck developed three dimensions of personality: extraversion-introversion, neuroticism, and psychoticism Extraversion-Introversion The extraversion-introversion personality dimension is a robust and highly heritable personality dimension that is recognized around the world. Characterized by both interpersonal and temperamental characteristics, the key features of extraversion-introversion are sociability and positive affect. The extraversion-introversion dimension became well-established as a result of its biological bases and its lexical significance in cross-cultural language. Extraverts encompass approach behaviors rooted in the need for increased stimulation caused by cortical under stimulation, while introverts demonstrate avoidance behaviors to inhibit overstimulation. Similarly, extraverts are more likely to engage in approach behaviors, commonly associated with impulsivity, while introverts are more likely to engage in avoidance behaviors, commonly associated with anxiety. Neuroticism Neuroticism, as a fundamental trait of general personality, refers to an enduring tendency or disposition to experience negative emotional states. Individuals who score high on neuroticism are more likely than the average person to experience such feelings as anxiety, anger, guilt, and depression. They respond poorly to environmental stress, are likely to interpret ordinary situations as threatening, and can experience minor frustrations as hopelessly overwhelming. They are often self-conscious and shy, and they may have trouble controlling urges and impulses when feeling upset. Psychoticism Psychoticism appears to be linked with certain hormonal and biochemical secretions, such as serotonin and dopamine metabolites and with sex hormones Psychoticism may be divided into narrower traits such as impulsivity and sensation-seeking.  Behavioral Theory Behavioral theories suggest that personality is the result of interaction between the individual and the environment. Behavioral theorists study observable and measurable behaviors, rejecting theories that take internal thoughts and feelings into account. The philosophical forerunner of behavioral psychology was called Positivism. Positivists held the view that science must be grounded in the evidence provided by our senses.  Behavioral Theory: B. F. Skinner B. F. Skinner believes that we have freedom only by way of the capacity to arrange our own circumstances. He once said: “We can arrange our environment so that the consequences we desire become likely, but having done so, we are under the control of our own creation Operant Conditioning - “Skinner recommends that we embrace the “fact” that our environment determines our behaviors”.”When we ignore the effects of outside agencies, such as governments and corporations, we only increase their control over us” Classical Conditioning. Pavlov's famously demonstrated classical conditioning in what is popularly known today as the “Pavlov's dog” experiment. Behavioral Theory: Albert Bandura (Social Cognitive Theory and Self-Efficacy) - Bandura thought that we have free will to a significant degree by way of selecting the environments and situations in which we choose to participate. - Bandura traced human behavior to both environmental factors as well as “person factors” such as cognition and other internal processes Future behavior is then adjusted based on what was observed and what we think will happen when the behavior is replicated.  Humanist Theory - Humanist theories emphasize the importance of free will and individual experience in the development of personality. - Humanistic psychology “emphasizes the present experience and essential worth of the whole person, promotes creativity, intentionalism, free choice, and spontaneity, and fosters the belief that people can solve their own psychological problems. Humanist Theory: Carl Rogers  Rogers defines the “one central source of energy in the human organism” as “the inherent tendency of the organism to develop all its capacities in ways which serve to maintain or enhance the organism.” This tendency serves as the basic motivation for all human activity and is called the actualization tendency. The actualizing tendency has four basic characteristics: 1. It is a biological predisposition and so exists as part of the inherent nature of humans. 2. It is an active rather than passive process. The actualizing tendency is at work in exploring, manipulating the environment, and even the creative process. 3. It is directional as opposed to random. It inclines us to grow into our own person and become independent from the control of other people. 4. It is a selective tendency, which means that not all of our inherent potentialities are realized. Humanist Theory: Carl Rogers Self-actualization refers to the lifelong process of enhancing our functioning in three specific ways: 1. Increasing our openness to experience. Experience comprises the mental activity at any one time of which we are conscious. The ability to accept all experiences into our awareness, without distortion one way or another, is the foundation of self-actualization. 2. Developing the capacity to live in the present. The self-actualized individual does not let past preconceptions interfere with her present actions. Similarly, she does not obsess over the need to control future outcomes. She “goes with the flow.” 3. Lastly, the self-actualized individual learns to trust his own intuitions, regardless of social conventions. He believes in the inherent trustworthiness of his fellow man and has great appreciation for the act of free choice.  Humanist Theory: Maslow (Basic Human Nature and Hierarchy of Needs) Maslow distinguished between deficiency motives (D-motives) and growth or being motives (B-motives). Deficiency motives are instinctive impulses to reduce such drives as hunger, thirst, security, and obtaining esteem from others. Every human has these motives. Appropriate external objects or people (water, siblings, etc.) are the objects of D-motives. B-motives, unlike D-motives, are independent of environmental factors and are unique to each individual. Also, B-motives are not reduced when their objects have been reached; rather, B-drives increase in intensity as they are fulfilled. B-motives “tend to represent a more pleasurable, higher, and healthier level of functioning.” Humanist Theory: Maslow (Basic Human Nature and Hierarchy of Needs) There are five levels of human needs in Maslow's hierarchy: 1. The lowest level needs are physiological needs. Most of these needs are deficiencies and governed by D-motives such as the need for food to eat, water to drink, oxygen to breathe, and so on. 2. After physiological needs have been satisfied the need for safety begins to emerge. 3. Next to emerge as primary motivators are the needs for belongingness and love. This could take the form of close friends, a spouse, or offspring. Maslow distinguishes between two kinds of love. 4. There are two kinds of esteem needs, one that is focused on personal desires and another that is focused on the desire for the respect of others. Overall competence, the mastery of a skill, and independence fulfill our need for personal esteem (self-esteem). 5. Self-actualization needs consist of discovering and eventually fulfilling our innate potential.  Psychodynamic Theory Psychodynamic theories of personality are heavily influenced by the work of Sigmund Freud, and emphasize the influence of the unconscious on one's personality  Psychodynamic Theory: Freud - Psychosexual Development and the Structure of Personality Freud's main contributions to psychoanalysis (and personality psychology in general) were his theories of psychosexual development and the structure of personality. He thought that human behavior could be best explained by the tension created between our most basic instincts and our attempts to control those instincts. “Our inherent nature is murderous, incestuous, and cannibalistic; so to enjoy the benefits of civilized society, we must accept some of the frustration and subliminate our true illicit desires into socially acceptable outlets.” He devised a tripartite structure of the human psyche that explains how these processes of drive and drive reduction are played out.  Psychodynamic Theory: Freud - Psychosexual Development and the Structure of Personality 1. Id: The id is a representation of the psyche as it is at birth. Thus, it represents the totality of one's psychic energy. It is “the dark, inaccessible part of our personality … a chaos and is entirely unconscious, and thus does not change or develop as we age. The id lacks a sense of time, morality, and rationality and is the biological side of personality (e.g. impulses, urges, libido) 2. Ego: The ego emerges around six to eight months of age, is directed toward the outside world, spans the conscious and unconscious realms, and functions according to the “reality principle.” Instead of seizing every opportunity for pleasure, the ego functions in a way that maximizes overall pleasure via problem solving. It is concerned with self-preservation, which is in direct conflict with the motivations of the impulsive id. The ego determines which actions of the id are dangerous to the self and checks these actions when necessary. (e.g. it mediates between the Id and Superego) 3. Superego: The superego spans the conscious and the unconscious. It develops out of the ego in the third to fifth years of life. It incorporates the social norms of the individual's surroundings, and functions according to the codes of conduct of the society in which the individual lives. It is easiest to think of the superego as one's conscience, as it rewards us with a feeling of self-virtue when we do not act impulsively or immorally and punishes us with feelings of guilt when we do wrong. ((e.g. the judgmental and morally correct part of the personality). Psychodynamic Theory: Carl Jung- Structure of Personality and Character Typology Jung believed that life itself consists in a set of opposites (the principle of opposites): day and night, birth and death, happiness and misery, introversion and extroversion, conscious and unconscious, thinking and feeling, love and hate, cynicism and belief, and haughtiness and inferiority. These contradictory ideas existing in one psyche produce tension and are the wellspring of our psychic energy. No personality is ever truly dominated by one or another opposite. Psychodynamic Theory: Carl Jung- Structure of Personality and Character Typology According to Jung, personality can be divided into three parts: Conscious, Personal Unconscious, and Collective Unconscious. The realm of the conscious consists of the ego and the persona. The persona is our outward appearance that we put on in order to satisfy the demands of society. Additionally, the persona reflects an individual's inner desires and fantasies. The development of the persona, like the ego, is guided by conscious experience. Jung thought that the unconscious is an autonomous entity, and that we are actually capable of carrying on a conversation with our unconscious. Psychodynamic Theory: Carl Jung- Structure of Personality and Character Typology Jung denies the existence of any formal stages of development, and thus does not attribute individual differences in personality to an individual's development. Instead, Jung explains that personalities differ according to the ways that people typically process internal and external stimuli, and “the characteristic direction (inward or outward) of libido movement.” Those who tend to focus their energy inward are introverts and those who focus their energy on the external world are extraverts. These are the two fundamental attitudes. Along with these two attitudes Jung hypothesizes four functions: sensation, thinking, feeling, and intuition. “Sensation tells you that something exists; thinking tells you what it is; feeling tells you whether it is agreeable or not, and intuition tells you whence it comes and where it is going.”  MODULE 5 THE BEHAVIORAL INVESTOR TYPE (BIT) FRAMEWORK FME211  ACTIVITY 1. Discuss the steps involve in BIT. 2. Describe each of the investor classifications in BIT.  BEHAVIORAL INVESTOR TYPE (BIT) BITs are models for various types of investors. This framework has four behavioral investor types: the Preserver, the Follower, the Independent, and the Accumulator These types of schemes tend to over-generalize about personality traits (since people are rarely only one type of person), but they are a useful tool for organizing one's thoughts about how to compare one type of person versus another. BITs are created to emphasize a dominant orientation or dominant trait of each BIT.  Four key points about personality and how they relate to BITs 1. Consistency - Essentially, people act in the same ways or similar ways in a variety of situations. With BITs this is also true. The idea is that when acting out their financial personalities, people will behave in repeatable patterns, akin to the person who is trying to lose weight and goes on yo-yo diets. 2. Psychological and physiological traits: Personality is a psychological construct, but research suggests that it is also influenced by biological processes and needs. Biology can and does have an influence on financial behavior. 3. Impact behaviors and actions - Personality does not just influence how we move and respond in our environment; it also causes us to act in certain ways. The only thing that really matters as it relates to financial personality is how a person behaves in relation to their money. 4. Multiple expressions - Personality is displayed in more than just behavior. It can also be seen in our thoughts, feelings, close relationships, and other social interactions. BITs are not intended to be clear-cut, unequivocal descriptions of each individual's investor personality.  THE BEHAVIORAL ALPHA PROCESS: A TOP-DOWN APPROACH Also called Behavioral Alpha, is a simpler, more efficient approach to bias identification  THE BEHAVIORAL ALPHA PROCESS: A TOP-DOWN APPROACH Step 1: Identify a Client's Active or Passive Traits Most advisors begin the planning process with a client interview, which consists mainly of a question-and-answer session intended to gain an understanding as to the objectives, constraints, and past investing practices of a client. Part of this process should include the advisor determining whether a client is an active or passive investor. passive investors have tendencies toward certain investor biases, and active investors have tendencies toward different biases.  THE BEHAVIORAL ALPHA PROCESS: A TOP-DOWN APPROACH Step 2: Administer Risk Tolerance Questionnaire - the process of identifying which one of the four behavioral investor type categories the client falls into The advisor's task at this point is to determine where the client falls on the risk scale in relation to how the client falls on the active/passive scale The expectation is that active investors will rank medium-to-high on the risk tolerance scale while passive investors will rank moderate-to-low on the risk questionnaire  THE BEHAVIORAL ALPHA PROCESS: A TOP-DOWN APPROACH Step 3: Test for Behavioral Biases - the process is to confirm the expectation that certain behavioral biases will be associated with unique behavioral investor types Example: a. if an investor is passive, and the risk tolerance questionnaire reveals a very low risk tolerance, the investor is likely to be a Passive Preserver (now simply called a Preserver) b. if the investor is passive and the questionnaire reveals a low-to-medium risk tolerance, the investor is likely to have biases of a Friendly Follower (now simply called a Follower) c. If an investor is active and has a medium-to-high risk tolerance, the investor is likely to be have Independent Individualist biases (now simply called an Individualist) d. if an investor is active and has a high risk tolerance, the investor is likely to have biases associated with an Active Accumulator (now simply called an Accumulator) THE BEHAVIORAL ALPHA PROCESS: A TOP-DOWN APPROACH THE BEHAVIORAL ALPHA PROCESS: A TOP-DOWN APPROACH  UPDATED BIT THEORY AND APPLICATION - the first step in BIT identification is to diagnose the orientation of an investor. Rather than testing for biases as the first step—in effect defining each BIT by the biases tested for—orientation identification is the first step.