Introduction to Finance in Sports Management
The business of sports is one of the largest businesses in the world today. Across the world, there is a wide variety of leagues across different sports that generate a lot of wealth as well as media attention. The turnover of big leagues in different sports runs into billions of dollars annually. Prominent examples of […]
Valuation of a Player in Sports
In the previous few articles, we have already seen that the valuation of a sports franchise is heavily influenced by the value of its human assets i.e. the players. This is because sporting franchises do not generally own a lot of assets. Hence, player contracts are one of the biggest contributors to the overall balance […]
Why do Investors Hold Fixed Income Securities?
The bond market is much larger in size as compared to the equity markets of the world. This is because a large portion of the bonds sold in the market is sovereign debt. For more than two centuries, various countries have been routinely turning to the bond market in order to borrow money. With the […]
Types of Sponsorships Given to Individual Players
In the previous article, we have already seen that sponsorship is one of the predominant ways in which a sports league can generate revenues. However, it is important to note that sponsorships can happen at various levels. For instance, sponsorship can be given to an individual, a team, or even an entire sports league. In […]
Technology and Banking Delivery Channels
Technology has touched every aspect of our lives in the recent years and banking has been no exception. Huge strides made by information technology have allowed banks to provide much better levels of service to their customers at drastically lower costs. The deployment of technology has also changed the channels via which customers interact with […]
Psychographic models have evolved over the ages. They first began with the Bernwall model, which was a one-dimensional model. It later evolved into the BBK model, which was a two-dimensional model. Finally, in recent times, three-dimensional psychographic models have been developed. In this article, we will have a closer look at the three-dimensional model as well as how this model helps us categorize investors according to their behavioral personality type.
It needs to be kept in mind that this model has not been developed by an economist or a psychologist. Instead, it has just come into existence because many practitioners in the investment market use this model. As a result, this model has not been exactly defined. Many variations of this model are widely used in different parts of the world. However, the gist of most variations remains the same and has been described in the below article.
The first personality trait which is used as an axis while describing investors is the degree of practicality. At one end of the spectrum are investors who are very pragmatic. They are aware of their capabilities and abilities as an individual investor. They factor in the fact that markets are not in their control. As a result, they tend to mitigate risks. Pragmatic investors are rightly skeptical about their own abilities to infer how the market will move in the future. Pragmatists always tend to be conservative. Pragmatists are generally prone to behavioral biases such as the conservatism bias.
At the other end are investors who are not so pragmatic. They have an exaggerated sense of self. They have an excessive belief in their abilities to predict the market. Also, they believe that since they have such prolific abilities, they are actually in control of their investments. Investors in this category are most likely to have overconfidence bias, self-attribution bias, and optimism bias.
The second personality trait relates to the investor’s ability to look at the big picture. The reality is that all investments made by an investor are actually interconnected and form one big portfolio. People who view their investments in an integrated manner tend to believe in this approach. Investors with a high degree of integration are aware of the cyclical nature of the markets. They are also aware of how various financial instruments act at different points of time in the cycle. Since they are aware of the correlation between their investment, they book losses and sell their investments if it means benefit to the overall portfolio.
Investors who have a low degree of integration tend to look at their investments as not being connected. They view each investment as a separate account which has no relation to the other account. Since these investors view each investment as separate, they are likely to hang on to the losers because of the loss aversion and anchoring bias mentioned in the earlier articles. These investors do not have the ability to look at the portfolio as a whole and exit an investment after realizing a loss if it would mean making a gain at the macro level. Investors with low levels of integration are most susceptible to have mental accounting bias because they are used to segregating different pots of money.
The third and final trait is the investors’ willingness and ability to realize that they have made a mistake and hence correct course. The mature investors are aware that investing is a probabilistic activity. Hence, the probability of failure is inbuilt in every investment that they make. It would close to impossible for them to never have made an investment where they lost money. Since mature investors are aware of this, they are able to easily make decisions under pressure.
Investors who are not mature have a difficult time accepting their mistake. Instead, they tend to rationalize the errors that they made and often give a wide variety of reasons as to why the decision made by them was correct under the given circumstances. Immature investors have a difficult time making decisions in the first place. They are the ones who suffer from decision paralysis the most since a wrong decision tends to take the maximum emotional toll on them. It would be fair to say that these investors are prone to regret aversion bias. These investors are also susceptible to other biases, such as endowment bias.
Each of the above-mentioned dimensions has a positive side and a negative side. It is possible for investors to have only negative traits or all three negative traits. These dimensions are more or less independent of each other. However, when looked at together, they are able to define the entire spectrum of personality types. Since there are three dimensions, a total of eight personality types are possible.
This model provides a comprehensive framework using which investors can introspect to find the biases to which they are most susceptible. Once they are aware of the possible mistakes that they are likely to make, the probability of making those mistakes reduces drastically.
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