22nd October 2024
Are there financial personality types?
How does our personality influence our financial decision-making?
22nd October 2024
How does our personality influence our financial decision-making?
As humans, we are constantly trying to simplify the complex and ever-changing world around us. We create groups and systems to help us make sense of new and challenging situations. These help us understand how we think, feel, and behave.
One way we try to simplify the world is by grouping people according to their personality type.
Personality psychology has been bleeding into pop-culture. There is a growing trend towards placing individuals into groups and categories, to describe similar patterns of behaviour. These patterns of past behaviour are then used to predict future behaviour. This is done using scientific or not-so-scientific methods.
In this blog we explore whether it is helpful for firms to group customers according to their ‘financial personality’.
One area that this trend can be seen is the analysis of peoples’ financial personality.
Investopedia published an article outlining five ‘money personality types’. This article suggests that all readers’ behaviours fall within these five categories, labelling individuals placed within categories such as ‘big spenders’ or ‘savers’. Depending on the category readers identified themselves with most closely, the article gave tips for future financial decisions which may benefit their ‘bottom line’.
On the face of it, this feels sensible. Describing financial personalities encourages people to consider and analyse their own financial behaviour. Once they understand their behaviour, they might be able to make better future financial decisions.
But does this one-size-fits-all approach overly simplify financial decision making? We outline the pros and cons below.
Thinking about your financial personality can help us reflect on our decisions. It offers us another lens to understand our financial behaviour. This reflection allows us to understand all the relevant factors affecting financial decision-making. When making a choice, people bring their personal beliefs, values, and emotions into each situation. Personality psychology helps to identify these.
Thinking about your financial personality could help you identify patterns of behaviour. Choices don’t happen in a vacuum. Every choice we make influences the next. Financial personalities encourage us to view our decisions as a pattern of behaviour, rather than one-off choices. This gives context for the choices we make moving forward. By understanding how our choices have impacted our lives, we can make more informed decisions.
Identifying financial personalities could help firms tailor their communications. Firms would also benefit from understanding their customers better. In theory, this information could help firms analyse their customer base, and then send personalised communications to their customers.
Financial personalities may be overly simplistic. A common criticism of personality psychology is that reducing all human behaviour to a handful of traits and tendencies is too simplistic. Every person is unique, and every financial decision different. We all understand how difficult it can be to match up to someone else’s view of us, even people we are close to. We need to be wary of personality categories getting in the way of seeing ourselves as we really are.
Identifying your financial personality is an art, not a science. Our personality is not like chemistry or physics with unchanging rules or facts. We constantly change and adapt to the situation we find ourselves in. Each person understands the world around us differently. One trait or category can have a completely different meaning to each person on any given day. There is subjectivity in the identification and naming of financial personality types.
Financial personalities may not be good predictors of future behaviour. Whilst traits may provide a useful lens for analysis of previous decisions, they cannot account for the complexity of every future situation. We can only know the situation and all the factors for each choice as they happen. Blindly predicting what may happen based on what has already happened could be harmful.
The allure of financial personality types is undeniable. Analysing consumers’ financial personality might allow firms to better tailor their communications and products. However, there is a risk that financial personality types are overly simplistic.
A key takeaway from personality psychology is the value of encouraging us to reflect on our past decisions. We are the sum of our life experiences, our decisions, and the situations we find ourselves in. Every previous moment leads to the choices people make as they go about our lives. Understanding this provides a wealth of context and understanding.
Encouraging customers to actively think and discuss their financial habits and attitudes towards money is a strong starting point. By engaging with their past behaviour, individuals may find it easier to identify the best options going forward.
In doing so, firms can make it easier for us humans to make better financial decisions.