The Follower Investor Type Explained - Behavioral Finance Chapter 9
Chapter 9 of Behavioral Finance and Investor Types by Michael M. Pompian introduces the Follower. And honestly, this one probably describes more people than any other type in the book.
The Follower is the investor who doesn’t really care about investing. They don’t have strong opinions about markets. They don’t spend weekends reading financial statements. They just follow whatever everyone else is doing. A friend mentions a hot stock at a dinner party, and they buy it. They see housing prices going up, and they jump in. Their entire investment strategy is basically “what is everyone else doing right now?”
The Follower Profile
Here’s the thing about Followers. They’re passive. They have a general lack of interest in money and investing. They want someone to tell them what to do. Their risk tolerance is actually lower than average, but they often think it’s higher than it really is. That gap between perceived and actual risk tolerance is where the trouble starts.
Pompian says it’s very common to find 40-year-old busy professionals who fit this description perfectly. They do superficial research. They chat about stocks with coworkers. They hear a tip and take a chance. And then they don’t even open their investment statements for months. The envelopes just pile up in the corner.
The Two Big Biases
Followers are mainly driven by cognitive biases, meaning this is about how they think, not how they feel. The two biggest ones are recency bias and framing bias.
Recency bias is when you look at what happened recently and assume it will keep happening. Pompian gives a great example with a cruise ship. If a passenger sees equal numbers of green and blue boats during a trip, but there happen to be more green boats near the end, they’ll remember there being more green boats overall. Recent events carry more weight in our memory.
For investors, this shows up when people chase hot mutual funds or asset classes. Emerging markets had a great year? Let me put all my money there. But here’s the problem. Asset class returns are wildly unpredictable from year to year. Something that tops the charts one year can be at the bottom the next. Pompian references a “periodic table of investment returns” that shows just how random these patterns are. The takeaway is simple: diversification beats return-chasing every time.
Framing bias is when you answer differently based on how a question is asked. Same information, different packaging, different decision. Pompian walks through a clever example with risk tolerance questionnaires. One question shows you a portfolio with a potential loss range of negative 20% to positive 44% and a 10% long-term return. Sounds risky, right? Another question tells you that same portfolio lost 7% last year, but reminds you it had good years before and that similar funds also dropped. Suddenly it feels more acceptable. Same portfolio. Same data. But the framing changes your reaction.
For Followers, this is dangerous because they don’t have strong independent views. So whatever way an investment idea is presented to them can swing their decision completely.
The Supporting Cast of Biases
Beyond the big two, Pompian identifies three more biases that Followers tend to show.
Hindsight bias is the classic “I knew it all along” response. After the 2008 financial crisis, plenty of people claimed the housing bubble was obvious. But before it happened? Most of those same people thought housing was a perfectly normal market. This false confidence makes Followers take bigger risks in the future because they think they can see crashes coming.
Cognitive dissonance happens when reality clashes with your beliefs and you choose to ignore reality. A Follower buys a stock that tanks. Instead of admitting the investment was bad, they throw more money at it. “Throwing good money after bad” is the common phrase. They blame bad management, bad luck, anything except their own decision.
Regret aversion goes the other direction. Followers who got burned in the past become too scared to make any decisions at all. They fear that whatever they choose will turn out to be the wrong move. So they sit on cash and do nothing, which has its own cost over time.
The Upside of Being a Follower
It’s not all bad. Pompian points out some genuine positives. Since Followers aren’t obsessed with money, they tend to live with less financial stress. They also don’t trade too much, and excessive trading is proven to destroy wealth. Low portfolio turnover means lower volatility and potentially better long-term compounded returns. And many Followers are smart enough to recognize they need help and hire a financial advisor. That alone can be a huge benefit.
Advice for Followers
Pompian’s advice for working with Followers comes down to education. Since their biases are mainly cognitive (thinking errors, not emotional reactions), they can actually learn their way out of bad habits. The key points:
- Recognize that Followers often overestimate their risk tolerance
- Don’t pitch too many exciting investment ideas to them because they’ll want to do all of them
- Teach the value of diversification with clear, simple data
- Stick to long-term plans and challenge them to be introspective about their tendencies
The steady, educational approach builds loyalty and keeps Followers on track. They need a plan and someone to hold them accountable to it. Without that structure, they’ll just keep chasing whatever trend their coworker mentioned at lunch.
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