Why self-awareness is a superpower in life and investing
Bias and emotion can cause otherwise rational people to make errors in judgment. To maximise your chances of success, it is vital to know thyself.
Here’s a brief experiment for you. Don’t worry, it will only take a minute. Stop reading here (but please come back) and just sit in silence for one minute. Go on, it won’t hurt.
Done? If you’re like most people, you won’t have experienced much silence. Within 10 seconds, you may have noticed thoughts running through your head. And these thoughts may have kept going. Some of them may have been quite random too. You might have thought of one subject, and then it branched off into an unrelated topic.
Don’t worry, that’s all normal. Nonetheless, it can be disturbing to realise how little control you have over your thoughts and how you react to them.
I’ve been an on-and-off meditator for a while, and meditation is a great tool for thought awareness and accepting thoughts as they come and go. Oddly enough, I’ve also found hypnosis is a powerful method for changing thought patterns. It delves into your subconscious, makes some tweaks, and alters thoughts and habits. Though in my experience, habits are hard to change and require ongoing work.
Cognitive biases and investing
While psychological tools for dealing with day-to-day life are advanced, those for becoming a better investor are just in their infancy.
The field of behavioural finance - studying how psychology affects financial decision making - only appeared about 20 years ago. Unsurprisingly, it found the mind impacts investing quite a lot, and that investors often don’t think and act rationally. That’s because biases and emotions cause errors in judgment.
The good thing about behavioural finance is that it’s come up with dozens of cognitive biases that investors need to be aware of. The problem is that it’s always been generic rather than personal: it’s never been able to specify which biases that you have, and how you can deal with them.
How personality influences outcomes
More recent research has shed further light on the personal. In fact, it’s found that your personality has a large influence on life outcomes, including financial success.
To understand why, let’s go through what psychologists define as the five broad personality types, known by the acronym, OCEAN:
- Openness to experience. Those open to new experiences are willing to try new things and use their imagination to embrace new ideas. Those at the other end of the spectrum are usually predictable, uncomfortable with change, and not very imaginative.
- Conscientiousness. The conscientious are organized and self-disciplined. Less conscientious people can be careless, impulsive, and procrastinators.
- Extraversion. The extraverted are social, outgoing, and happy to be the centre of attention. The less extraverted are usually reserved, reflective, and happy in solitude.
- Agreeableness. This measures how people tend to treat relationships with others. The highly agreeable are empathetic, trusting, and compliant. Unagreeable people are less caring and can be demanding and even insulting to others.
- Neuroticism. This describes the emotional stability of a person. The highly neurotic are anxious, often hostile, and experience significant shifts in mood. Those less neurotic are calm, resilient, and rarely sad or depressed.
Figure 1: Five factor model for personality traits. Source: Anna Vital/J.M. Digman
You’re not just one personality type; you’re a blend of them.
Studies show your personality type can remain relatively stable through your life. And that it’s influenced by both genes and the environment. Roughly 50% is thought to be inherited.
There are lots of websites where you can take a relatively quick quiz and get scored on the five personality traits, including OpenPsychometrics, FiveThirtyEight, and Truity.
Personality types and finances
The science suggests that your personality type is a good predictor of important life outcomes, including financial net worth.
Those open to experiences have higher salaries. They’re not as organized as the conscientious, but they tackle projects and investing with energy and imagination. However, they’re also inclined to spend more and enjoy the finer things in life.
Of all the types, conscientious people are most associated with career and financial success. They plan ahead, have shorter periods of unemployment, and are less indebted. Yet the tradeoff is that the conscientious are not as happy as some other personality types such as extraverts.
Extraverts earn higher salaries and have greater happiness. However, they don’t tend to be great with money as they spend too much and save too little. They’re also inclined to take greater risks with their cash.
Agreeableness is associated with lower salaries and net worth. Agreeable people might be nice, but that may also be their downfall. And like extraverts, they like to spend a lot, and not save enough.
Lastly, neurotics are also linked to less financial and career success. Unfortunately, they end up less happy due to higher levels of anxiety and stress.
Understanding personality types can help with investing
Unlike many psychologists, I don’t see personality types as deterministic. Just because you have ‘x’ personality doesn’t mean that you’ll have ‘y’ outcome. Instead, they indicate tendencies.
I think they’re a useful tool for becoming more self-aware. For instance, the personality tests show that I score reasonably high for conscientiousness, and reasonably high for openness. Though I also test moderate for neuroticism and very low for extraversion.
What this tells me is that I need to guard against a number of things. My mild neuroticism means I have some anxiety and don’t react calmly in all situations. My introversion suggests that I need push myself to meet more people, be more social, and be bold enough to ask for that pay raise if I deserve it! Also, my risk aversion means that I should try to take on more risk where it’s prudent. And I possibly need to seek out fund managers and financial advisers who embrace risk more than I do.
Doing all of the above could improve my chances of being financially successful.
Self-awareness as a superpower
If I’ve learned anything through the decades, it’s this: know thyself. Self-awareness is a superpower in life and investing. And tools to increase self-awareness can provide an infinite return on investment.
