What Bailard, Biehl And Kaiser Can Teach Investors

A risk profiling exercise can offer a number of insights into the investment behaviour of an individual. Their inherent personalities can also do the same. The Bailard, Biehl and Kaiser (BB&K) investor personality model is quite helpful in this regard. And in today's blog post I'm going to focus on the various aspects of the BB&K model. I'm going to list out the various types of investor personalities and the peculiar nuances of each group of investors. I will end by showing how the BB&K model can be used with traditional risk profiling tools to make the findings more relevant

Understanding The BB&K Model

The BB&K Test classifies investors into five distinct categories namely Individualists, Adventurers, Celebrities, Guardians and Straight Arrows. The classification is made based two major dimensions. These being the level of confidence with which an individual makes decisions (ranging from anxious to confident) and their approach to decision making (ranging from careful to impulsive). So this test acts as a reflection of the individual's behaviour in various aspects of their lives, including investing and money management.

Individualists

Such people are fiercely independent. They prefer to make their own decisions as far as possible. They carefully analyse and weigh up the pros and cons of each option before making a decision. This rational approach to decision making allows them to act with confidence. But at the same time, they may analyse things a little too much. This leads to a gap between thought and action. This inertia may see them lose out on opportunities that are ideal for them.

Adventurers

They are highly confident and more willing to take risks. They would have no problems taking a significant bet on an opportunity that interests them. But they are highly unlikely to listen to wise counsel. They exhibit excessive impulsiveness when making decisions. And this sees them suffer irreversible losses at times. They must therefore learn to temper their impulsiveness with caution.

Celebrities

They have the confidence to take risks, but also fall prey to FOMO (Fear Of Missing Out). They therefore try to participate in every investment opportunity that comes their way. They do this regardless of how well the opportunity is suited to their needs. They get influenced by any formal or informal advice that comes their way. Therefore, the biggest risk they face is that of falling into unscrupulous or incompetent hands. This may see them make extremely ill informed decisions which come back to haunt them. They must therefore make peace with the fact that some opportunities will definitely pass them by.

Guardians

They are in many ways the polar opposites of the Celebrities. Guardians usually encompass senior, more mature and prudent investors. They are those who are more likely to have created significant wealth. And they would now be looking to protect it. They therefore prioritise capital preservation over maximising returns. They actively seek out advisors as prudent as they are. They appreciate logical, well reasoned advice. The common issue among Guardians is that of fear. Their fear is made evident by their desire to avoid risks as far as possible. But excessive aversion to risk may give rise to inadequate returns, thereby leaving guardians at the risk of outliving their money. They must therefore learn to be more open to the prospect of taking a reasonable degree of risk.

Straight Arrows

They are usually the most well balanced investors. They display a near perfect mix of confidence when acting on decisions and prudence when arriving at them. This means that their investment behaviour has very few weaknesses of note. Their investment behaviour can be considered to be ideal for all 4 other categories of investors. They are likely to have very little need for professional advice. They mostly just need to keep doing what they already are until their goals are achieved.

Final Thoughts

Traditional risk profiling methods include questionnaires and situational analysis. They usually allow the individual some time to think before responding. This may lead to situations where respondents are not completely honest with their responses. Financial plans prepared based on partially honest responses would likely produce suboptimal results. But an individual's personality cannot be hidden or manipulated for too long. The categorisations as per the BB&K model provide a more realistic reflection of an individual's capacity and willingness to take risks. This would allow them to prepare much more relevant and effective financial plans. Responses to traditional risk profiling tools can be used as a starting point when preparing a financial plan. But all material aspects of the plan would be better designed if lean heavily on insights gained from the BB&K model.