The main criticism of the Barnewall model was that it only classified investors into two types. This created an oversimplification. Practitioners of behavioral finance wanted the classification to be more accurate and inclusive. This is the reason why they started creating another psychographic model.
This model is called the Bielard, Biel, and Kaiser model, i.e., the BBK model. As a part of this model, investors are classified into four different categories instead of the erstwhile two categories.
What is the BBK Model?
In the case of the Barnewall model, investors were classified based on one single parameter. Hence, they could be plotted on a single axis. In the case of the Bielard, Biel, and Kaiser model, this is not the case. The model is two-dimensional, and hence there are two axes involved. Since the intersection of the two quadrants creates four quadrants, the investors are divided into four categories.
The first axis in the BBK model is the level of confidence which the investors possess. Investors who have a high level of confidence with regards to health, money, etc., also have a high level of confidence with regards to their investments. This axis basically classifies investors into two types, viz. confident and anxious.
The second axis in this model is the method of action. The second axis measures the degree of rationality exhibited by the investor. Here the question to be asked is whether the investor is methodical and follows a predictable pattern of collecting information and analyzing it before making decisions. On the other hand, the investor could make emotional and erratic decisions without following any due process. This axis classifies investors as careful and impulsive.
The combination of these two axes creates four different types of investors. Their characteristics are as follows:
- Confident and Impulsive
- Anxious and Impulsive
- Confident and Careful
- Anxious and Careful
- The Adventurer: Investors who are confident as well as make impulsive decisions have been classified as the adventurer in the BBK model. These are the kinds of investors who will make very risky investments. They are often seen investing in the futures and options space with high amounts of leverage. Often, they put all of their money on one single bet based on the level of confidence they might have on that bet. From the advisor's point of view, such investors can be difficult to give advice to. This is because they have their own ideas about investing and are not afraid to test them in the marketplace.
- The Celebrities: These investors are also known for making impulsive decisions. However, instead of being confident, they are known for being anxious. This is the worst combination of traits amongst the four quadrants! The celebrities are not confident. Hence, they do not have their own investment theories. This means that they are gullible and are often taken advantage of by middlemen who want them to trade excessively so that they can earn commissions in the process. As an ethical advisor, one may have to make emotional appeals to this type of investor since they often do not respond to rationality.
- The Individualists: This category of investors is both confident as well as methodical. These types of investors have their own investment philosophy. They tend to know something about the market or at least make an attempt to learn before they invest their hard-earned money. Also, since they are very rational and analytical, they tend to come to the right conclusion. This is the best combination of traits in the four quadrants. Such investors are closest to the textbook rational investors. However, it needs to be noted that very few investors actually fall in this category. These are the best possible clients for an investment advisor since it is possible to make rational arguments and convince these investors. If it makes sense, then convincing these investors will be easy. If they are made aware of their behavioral biases, they are most likely to correct their course.
- The Guardian: The guardians are anxious as well as careful at the same time. This category of investors generally comprises of old people who are nearing retirement. These people tend to be quite methodical when it comes to decision making. However, they are also quite anxious about the safety of the money that they invest. Guardians are generally people who have a limited earning capability. Hence, they are more likely to preserve the assets that they have instead of taking risks. Guardians are generally not interested in volatile investments. As an investment advisor, they can be difficult to advise since they are also partly driven by the emotion of fear. If these clients get a feeling that the advisor is overbearing, they are most likely to change the advisors as well.
- The Straight Arrow: The four main quadrants are already described above. However, the BBK model has been extended to include a fifth category. This category is represented in the center, i.e., the interaction of the two axes. They are called the straight arrows. This is where a lot of investors tend to fall. These investors are known to have a composite of all the four traits and hence are known to be fairly balanced. Oftentimes, they are called the average investor since most investors a person comes across are likely to fall in this category.
This model becomes widely popular after the Bernewall model and continues to be used till today by the investing community.