Personal finance and Summer reads: what do personality tests teach us?
For many of us, the summer months are synonymous with holiday and relaxation; a time for easy breezy reading featuring all manner of tests and quizzes… and perhaps a horoscope or two for fun. Such summer reads also provide interesting insight into how we perceive descriptions of who we are, ultimately feeding into decision bias. Edouard Camblain, our behavioural finance expert and Head of Strategic Projects & Development at Societe Generale Private Banking, tells us more.
“While you have some personality weaknesses, you are generally able to compensate for them”
This statement probably resonates with you. Keep reading all the same if it does not: you would be surprised just how many people it does “apply” to, and we can learn a thing or two from analysing it.
Also, we did not choose it by chance… in fact, it was not even written for this article! It comes from a scientific paper(1) published in 1948 to demonstrate the fallacious logic of the personal validation and gullibility of individuals. In it, the author American psychologist Bertram Forer carries out an experiment with a group of students. Without telling them the purpose of the experiment (a research paper), he asked the students to agree or disagree with a short list of basic statements (for example: “some of your aspirations tend to be pretty unrealistic”) based on which Forer would draw up a supposedly personalised psychological profile. While the students gave different answers, they all received the same profile description: a series of statements taken from horoscopes. They were each asked to rate how well the profile matched their perception of their own personality. The average score was around 4.3 on a scale of 0 to 5
This tendency to apply a vague personality description to oneself was coined the “Forer effect”, named after the researcher, or the “Barnum effect”. P.T. Barnum was a showman who in the 1850s invented the “cold reading” method which involved calling out general statements to a member of an audience who would interpret them as uncannily suited to their personality! The literature supporting the "Barnum effect" was reviewed and summarised by two Americans researchers(2) . They reveal that the “Barnum effect” is reinforced by:
- the trust placed in the person making the statements;
- the target’s belief that the content is uniquely destined for them;
- the prevalence of positive statements (as opposed to negative ones).
“At times you have serious doubts as to whether you have made the right decision or done the right thing”
Another statement straight from Bertram Forer’s paper that segues rather well into our reflection on the impact the Barnum effect can have on our financial decisions.
Forer’s experiment was mainly to warn us how gullibility can make us particularly vulnerable to all sorts of financial scams. We therefore need to keep our wits about us and remain circumspect when were are pitched financial products. Without systematically suspecting dishonesty, we must be wary of “Barnum statements” by which universal statements are passed off as unique. That company we should invest supposedly for its “competitive advantage”? Keep in mind that at some point, all companies have a niche business, a particular regulatory authorisation, or a solid management team.
Thanks to researchers, we know how certain factors can make so-called personalised advice sound even more so. Keep your instincts well-honed! If an asset allocation or a financial product is presented as “uniquely adapted to your needs”, ask yourself if it really does fit with your family situation and financial position. You may be convincing yourself that it is, just as you would when reading your personal horoscope.
But for now, let’s get back to our summer quizzes and horoscopes. Perhaps with a little bit more to think about!
(1) Paper published in 1949 entitled The fallacy of personal validation, a classroom demonstration of gullibility,
http://apsychoserver.psych.arizona.edu/jjbareprints/psyc621/forer_the%20fallacy%20of%20personal%20validation_1949.pdf
(2) Paper published in 1985 entitled The Barnum Effect in Personality Assessment: A Review of the Literature,
https://cortecs.org/wp-content/uploads/2014/12/the-barnum-effect-in-personality-assessment-a-review-of-the-literature.pdf
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