Six financial personality types — which one are you?
Do you have a friend who always insists on picking up the bill at social gatherings? Their extreme generosity may not stem from huge wealth, but from status anxiety.
Or are you the sort of person who obsessively checks their bank balance or investment portfolio? You may feel like a spreadsheet superhero, but in fact, you could be overcompensating for a lack of control elsewhere in your life.
Perhaps you consider yourself a budgeting champion because you are so good at grabbing bargains online. Yet if discounts drive you to spend money on things you don’t need, your shopping habits could signify loneliness, or a lack of self-esteem.
Financial psychology is a somewhat overlooked discipline that occupies the space between psychology and behavioural economics. Advertisers and marketeers trying to tempt us to spend money are well aware of it — yet consumers will increasingly benefit from taking the time to understand it.
Britons spend twice as much time online as they did a decade ago, more than 20 hours per week. And because online shops, banks, comparison sites and investment platforms never close, our money issues have the potential to become dangerously exaggerated.
“Behaviours around money have become more extreme than a generation ago,” says Geoff Beattie, a professor at Edge Hill University, Lancashire, who studies the psychology of consumption.
With smartphones always to hand, there is “so little friction between ourselves and any little impulse we have”, adds Polly Mackenzie of the Money and Mental Health Policy Institute.
The lengthening hours we spend in the digital environment allow organisations that want our money to control us subtly by nudging our impulses to spend, trade or obsess, she says.
Yet if we understand how the financial environment affects us, we can better control our cash instead of being controlled by it, turning us into more rational investors, more successful savers or less impulsive shoppers. It could also help us to recognise unhealthy patterns, such as addictive consumption or problem debt, and the underlying issues that may be triggering problem behaviour. This could prompt a trip to a medical professional — or a debt counsellor — further down the line.
The psychologists interviewed for this article broadly agree on the following six financial personality types. Seeing as a little introspection could make you wealthier, is it time to ask — which one are you?
The Anxious Investor
Lovers of risk, anxious investors trade frequently and believe they have the edge over others. Despite their overconfidence, they are prone to be beaten by the markets — and frequent trades mean they often rack up high levels of charges.
Greg B Davies, who studied the trading patterns and financial personalities of thousands of retail investors in his former role as head of a specialist behavioural finance unit at Barclays, says this personality type is extremely common among affluent investors.
“They overtrade and have an action bias, which is a tendency to want to do things instead of not do things,” he says. “They often buy high and sell low as they are more comfortable with risk when things are good, and remove risk when times feel bad.”
Mr Davies, who has since launched consultancy Centapse, says such people tend to underperform the buy-and-hold investor “by 1.5 per cent to 2 per cent year” based on his analysis.
“I have also measured such people’s belief in their own skills,” he adds. “Many have absolutely no idea what their returns actually were and only remember their good decisions.”
Harold Evensky, chairman of US financial planning firm Evensky & Katz, says that in his almost four decades of experience, most clients who trade tend to get things wrong.
“The day trader or hobby trader is someone who typically exhibits an extreme level of overconfidence,” he says.
This is borne out by recent data on investors taking out leveraged “contracts for difference” on spreadbetting websites collected by the UK financial regulator. The great majority — 82 per cent — ended up losing money, and the average result was a loss of £2,200.
A 2011 study by academics at the University of California found most individual investors underperform standard investment benchmarks. One reason was that they were trading instinctively rather than strategically, and “repeating past behaviours that coincided with pleasure while avoiding past behaviours that generated pain”.
Financial markets can become an addictive environment. “Trading fires up the pleasure centres in the brain,” says Mr Davies. “The longer you stay in an addictive environment, the more prone you are to bad decisions, which causes anxiety, which leads to overtrading and therefore more anxiety.”
So how to break this damaging habit? He suggests that traders should write their own rules before starting, and stick to them. “Have a plan, use stop losses, have rules on when and how you rebalance a portfolio,” he advises. “I call this decision-making prosthetics. Not an artificial limb, but an artificial way of making better decisions that we impose on ourselves.”
Mr Evensky’s solution is simpler: just stop, or limit your trades to a small amount of ringfenced cash you can afford to lose. Consider using some of the money saved to pay a financial planner to help you structure your long-term financial goals.
For hoarders, money represents security. They abhor risk and may even stockpile cash that they would probably be better off investing — or even spending.
“I met a man the other day who was 94 and saving half of his pension,” notes Adrian Furnham, professor of psychology at University College London. An extreme case — but risk aversion is widespread.
In the UK, pensions freedoms introduced in 2015 allowed the over-55s to access their retirement savings — in other words, money invested in the markets for long-term future gains. Yet statistics suggest that about one-third of people who have made withdrawals have simply put the money in savings accounts, even though interest rates are at record lows and their actions could have triggered a tax penalty.
“People could well be cashing in their pensions as they fear [the value] will drop if they don’t take it out of the market,” says Claudia Hammond, a psychology lecturer and author of the book Mind Over Money. “If you were raised in a family where money was tight, you may tend towards the type that needs a lot of security.”
Everyone needs a rainy day fund, but cash is not a suitable long-term investment (even more so at a time of rising inflation). Find an adviser you feel comfortable with who can discuss the right investment approach — and level of risk — for you.
The Social Value Spender
Does shopping make you happy? Do you frequently buy your loved ones presents “just because” and blow the budget at Christmas and birthdays? You could be a social value spender, which the Money and Mental Health Policy Institute defines as someone who makes purchases (either for themselves or others) to boost their self-esteem.
At its most extreme, this behaviour can resemble alcoholism, says Prof Beattie. “I’ve interviewed people who have bags of new clothes hidden all over the house so their loved ones cannot see them,” he says, comparing this behaviour to the way problem drinkers stash away empty bottles.
In others, symptoms are less extreme. “Perhaps you get the hit of enjoyment from looking at things in a shop, or handing over your card. Or even when you wear something new for the first time, and people say it looks nice,” he says.
This is, of course, how consumerism works. But those who spend and buy too much could subconsciously be using money as a proxy for love and affection, adds Prof Furnham. Sadly, debt problems are often the end result.
Consumers offered nearly four years of interest-free repayments on balance transfers
“You feel loved when you give a gift. You feel like you will be more accepted in a group if you own the right things. But the effects of retail therapy do not last. Once you have returned home or received the package the buzz has often worn off,” he says.
Women are not the only ones to exhibit this behaviour, he says, though they are more likely to buy clothes, whereas a man may try to enhance his own sense of value “with a single unambitious status symbol, like an expensive car”.
With UK consumer debt at record levels, if you are concerned about your spending and borrowing habits you need to study your bills — perhaps with the support of a close friend. Work out how much you are spending on impulse, and the interest on any debts. Switch to a zero-rate deal and work out how much you need to pay a month to clear the balance within the offer period, then budget accordingly.
The Cash Splasher
A close cousin of the social value spender, the “splasher” is more likely to be male and tends to spend money on others very visibly, Ms Hammond says. For example, they may declare at the beginning of a meal in a restaurant that they are going to cover the bill. The occasion is then “all about them, and how nice and generous they are,” she says, noting this is “entirely different to going up and paying for something quietly.”
Be clear on your lifestyle and make work and spending decisions aligned with a vision
Cash splashers view themselves as generous, but they also use money to make others think more highly of them. They are likely to wave their cheque books about at charity auctions, and spend money on things they could easily do without, from expensive cars to club memberships.
Prof Furnham believes splashers are also motivated by a desire to be admired. “Having a lot of cash makes me popular and I can get love,” is his description of the type.
People who recognise these traits should realise that “spending does not make you happier if it is being done to show off”, says Ms Hammond.
True contentment, she adds, can be achieved by spending money on experiences one intrinsically enjoys — and they do not have to be expensive. Take your children for a picnic, listen to grandma tell her stories, or cook your friends a meal. “The motivation should be the connection with others, and not what doing a certain thing will look like on social media,” she says.
The Fitbit Financier
Go on, admit it. You check your online bank balance and track your spending as often as someone training for an extreme sporting event measures their calorie intake, resting heart rate and sleep quality. As well as obsessing over credit card points, you probably like to use comparison sites and download apps that track your budget or remind you when to remortgage.
Switching providers and keeping on top of money matters is a good thing. But one underlying reason for wanting such strong control of your finances is that you may have lost control of other areas of your life.
“There are some people who get very emotionally attached to this behaviour,” says Prof Beattie. “They think they have gained this intimate knowledge that their neighbour doesn’t have, and can share it. They’ve solved the mysteries of the financial universe and they will be admired.”
Obsessing over boiler insurance on internet forums is a modern phenomenon, but the roots of the behaviour are ancient, he says: “Think of the shaman in tribal societies.”
For Ms Hammond, however, a Fitbit Financier desires control, noting that “people who find it hard to deal with the unpredictability of life can become super-organised with money”. She has found some people with eating disorders have a corresponding obsession with their money. Both behaviours can stem from a similar belief — that taking control of something tangible like money or food can substitute for meaningful control of one’s life.
The real trigger could be anxiety about bigger life changes, such as fear of redundancy or your children leaving the nest.
“Some people find it hard to deal with the unpredictability of life, and want to control any aspect of it that they can,” says Ms Hammond. She recommends trying to feel calmer about change and unpredictability, instead of tipping over into obsession.
You may also need to take a step back and look at the bigger picture. Do you need more professional advice than internet forums can provide? Are your long-term financial goals being met when it comes to pensions and investments? A session with a financial planner could help you identify your goals and plan for a less stressful future.
Finally, the Ostrich — someone who would rather bury their head in the sand than organise their finances. Piles of post lie unopened on the doormat, and they seldom open their bank statements. Older birds may have money, but consistently fail to make long-term investment decisions.
Anxiety drives this behaviour too, says Ms Hammond. “Making no decision always feels easier than the possibility of making the wrong decision,” she says.
The UK government’s decision automatically to enrol employees into a pension scheme unless they opt out “is really clever from a psychological perspective, as many would rather do nothing”, she adds.
A more sophisticated version of the Ostrich, adds Mr Evensky, is the wealthy investor who hands their finances to an adviser or discretionary manager but does not check what is being done with the money, or the investment charges that may be eating into their returns.
“At one level, you have the client who walks in with brown bags full of papers and statements and has no idea,” he says. “More commonly, you have those who have a single account with a brokerage firm and just have no idea about what it is being invested in, or why.”
Ostriches should take their heads out of the sand — slowly. Set aside an hour a fortnight at first to examine your finances, taking a close look at your income and outgoings, and where being more organised and aware could save you money.
Start with a simple goal, such as finding a better savings rate. Your success will inspire further confidence. If you are a homeowner, the biggest change to your monthly budget could come from seeking a better mortgage deal.
Motivate yourself by putting your saving towards a reward, such as a holiday. As you become more confident, consider approaching a financial planner to discuss longer term investments and pensions.
Which financial personality type are you? Click here to take the FT’s free interactive quiz about the psychology of money