Investment Personality Diagnostic Tests
This is a retelling of Chapter 5 (Diagnostic Tests for Investment Personality) from “Behavioral Finance for Private Banking” by Thorsten Hens, Enrico G. De Giorgi, and Kremena K. Bachmann (Wiley, 2018).
So we talked about biases, we talked about brain science. Now comes the practical question: how do you actually figure out what kind of investor you are? Not what you think you are. What you actually are. Because those two things are very different for most people.
Meet Fritz Muller, the Unlucky Investor
The chapter opens with a case study. Fritz Muller is a fictional Swiss investor who keeps losing money. In summer 2009, after watching media coverage of the UBS rescue, he bought shares in Credit Suisse and UBS. He was sure the financial crisis was over, the bottom was in, the rebound was coming.
Then 2011 happened. The euro crisis hit. Both stocks tanked again. Fritz lost more than half his wealth. Again.
But here’s the thing. It wasn’t bad luck. Fritz made almost every classic mistake from the previous chapters. He got his information from media and friends. He bought only Swiss bank stocks (home bias). He had no diversification at all. No bonds, no commodities, nothing else. He tried to time the market. And he underestimated how fast stocks can drop in the short term.
The question is: were these one-time mistakes, or is Fritz just wired this way? That’s what diagnostic tests try to answer.
Two Ways to Test Investors
The authors suggest two methods for diagnosing investment personality. The first is psychometrics, a standard psychology approach. You ask similar questions multiple times, score the answers, and map the total score to a risk profile. It’s standardized, easy to run. But it has limits. Scoring is linear, so it can miss complicated interactions between answers. And some clients find it too “psychological.”
A well-known example is the DOSPERT scale. It tests risk-taking in five areas: financial, health, recreational, ethical, and social. It was tested on a big sample, refined from 101 questions down to 30, and you can actually download it from dospert.org.
The second method the authors propose is a questionnaire built around two dimensions: financial knowledge and emotionality. This is the one they spend the rest of the chapter building out, using Fritz as the example.
Testing Financial Knowledge
The knowledge questions are straightforward. They test whether you understand basic facts about investing that most people get wrong.
Do You Know Which Assets Return More?
First question: sort asset classes by their long-term return potential. Stocks, bonds, real estate, commodities, hedge funds, savings accounts.
The correct answer, based on history: stocks and real estate do best long-term. Bonds and savings accounts are at the bottom. Fritz got the extremes right but thought too highly of commodities. Probably because he remembered gold hitting all-time highs during the crisis. That’s recency bias at work.
Do You Know Which Assets Are Riskier?
Second question: sort asset classes by short-term loss potential. Historically, stocks and commodities can lose the most in the short run. Fritz knew savings accounts and bonds are safe, but he underestimated how much stocks can drop. And he got hedge funds and commodities mixed up.
This matters because if you don’t understand short-term risk, you will panic when the drop happens. And you will sell at the worst time.
What Actually Drives Investment Performance?
Third question, and this one is important: rank these three factors by their contribution to investment results. Product selection (picking stocks). Market timing (trying to buy low, sell high). Investment strategy (long-term allocation across asset classes).
Research by Ibbotson and Kaplan showed that up to 90% of investment success comes from your long-term asset allocation strategy. Not stock picking. Not market timing. The strategy.
Fritz got this completely backwards. He thought market timing was the most important factor. That explains everything about his behavior. He was trying to time Credit Suisse and UBS because he believed timing was the key to winning. It’s not.
How Many Stocks Do You Need?
Fourth question: how many stocks do you need for a well-diversified portfolio? The answer is somewhere between 10 and 20. After about 15 titles, adding more doesn’t reduce risk much, but you keep paying more fees.
Fritz thought two stocks were enough. Two. That’s not diversification. That’s a bet.
Testing Psychology and Emotions
The emotional side of the diagnostic is where it gets interesting. These questions reveal biases you might not even know you have.
Are You Chasing Big Returns?
The authors present two investments. Investment A returns 10% in 50 out of 100 cases. Investment B returns 50% in 10 out of 100 cases. Both have roughly the same expected value. But a risk-averse investor should pick A, because the probability of getting paid is much higher.
If you pick B, you are overweighting unlikely events. You are attracted to the big number and ignoring the low chances. This is exactly the pattern that prospect theory describes. People overweight rare events with extreme payoffs. It’s why lotteries sell so well.
Fritz actually got this one right. He picked A.
Where Do You Get Your Information?
The questionnaire asks investors to rate information sources: price movements, media, product brochures, friends, own judgment. Each source has its own trap.
Price movements create an illusion of predictability. Media coverage is biased toward negative events. Product brochures are marketing, not analysis. Friends only tell you about their wins, never their losses. And relying too much on your own judgment can mean overconfidence, especially if you don’t have the skills to back it up.
Fritz rated media, friends, and price movements as very important. That’s three out of five information sources that are likely to mislead him.
Do You Trade on Emotions?
Here’s a simple test. If a stock moves randomly but on average goes up, what should you do? Buy and hold. That’s it. There is no pattern to exploit. Random is random.
But many investors can’t help themselves. They wait too long to buy, then sell too quickly after a small loss. Fritz did exactly this. He tried to time the random walk, and the result was more trading costs and worse performance than simple buy-and-hold.
What Makes You Sell?
Last question: what triggers a sell decision? The options are suffered loss, downward trend, big price swings, or a change in the investment thesis.
The only good answer is the last one. If the reason you bought has changed, sell. Everything else is emotional reaction. Selling after a loss is backwards, because the loss already happened. Trends reverse without warning. Price swings are normal in stocks.
Fritz sells after losses. Which means his emotions are running his portfolio.
The Four Investor Types
After scoring all the answers, the authors map investors onto a two-dimensional grid. One axis is financial knowledge (low to high). The other is emotionality (low to high). This creates four investor types:
Intuitive investor (low knowledge, high emotions). This is Fritz. Makes decisions based on feelings and limited understanding. The recommendation: delegate your investments to a professional. Seriously.
Exploring investor (low knowledge, low emotions). Not very knowledgeable but also not driven by panic or excitement. Good fit for a core-satellite strategy. Keep the core safe and diversified, use a small satellite portion to try new ideas.
Realistic investor (high knowledge, high emotions). Knows the facts but still gets emotional. Best served by a simple, well-diversified ETF portfolio with low costs. The simplicity removes opportunities for emotional interference.
Strategic investor (high knowledge, low emotions). The ideal type. Understands markets and stays calm. Can handle sophisticated strategies, risk premium harvesting, tactical overlays, tail-risk hedging.
My Take
This chapter is practical. It gives you a framework to actually test yourself, not just read about biases in theory. The Fritz Muller example works well because he’s not stupid. He’s just a regular person who doesn’t know what he doesn’t know.
The four investor types are a useful mental model. Most of us are somewhere between intuitive and exploring. And that’s fine, as long as you’re honest about it. The danger is when an intuitive investor thinks they’re strategic. That’s when the real losses happen.
The biggest takeaway: about 90% of your investment success comes from your long-term asset allocation. Not from picking the right stock. Not from buying at the perfect moment. Just from deciding how much goes into stocks, bonds, real estate, and other asset classes. And then leaving it alone.
Simple, boring, and effective. The exact opposite of what Fritz was doing.