Chapter 2

The History of Behavioral

Five-Way Model
Two-Way Model
By
By
Bailard, Biehl, and Kaiser
Barnewall (1987)
(1986)
Two-Way Model
❑ One of the oldest and most dominant model , which was intended to
help investment advisors interface with clients and distinguish between
two relatively simple investor types:-
1. Passive investors Two-Way
2. Active investors Model

Passive Active
Investors Investors
Passive Investors
❑ “Passive investors” are defined as those investors who have become wealthy
inactively- for example, by risking the capital of others rather than risking their
own capital or got their wealth by inheritance.
❑ Passive investors have a greater need for security than they have tolerance for
risk. Occupational groups that tend to have passive investors, e.g. include;
Corporate Executives, Lawyers with large regional firms, certified public
accountants with large CPA firms, Medical, Dental, individuals with inherited
wealth, small business owners who inherited the business, Politicians and
Bankers.
❑ The Smaller the financial resources an investor has, the more likely the person
is to be a Passive investor. The lack of resources gives individuals a lower
tolerance for risk. Thus, a large percentage of the middle and Lower classes are
passive investors .

Item Explanation
Source Risking the Capital of Others or got their wealth by inheritance
Risk Tolerance Taking Low Risk and prefer high security
Profession e.g. Executives, accountant, doctors, small business owners
Active Investors
❑ Active investors are defined as those individuals who have earned their own
wealth in their lifetimes. They have been actively involved in the wealth
creation, and they have risked their own capital in achieving their wealth
objectives.
❑ Active investors have a higher tolerance for risk than security and due to their
high risk tolerance, they prefer to maintain control of their own investments.
But If they become involved in an aggressive investment of which they are not
in control, their risk tolerance drops quickly.
❑ Their tolerance for risk is high because they believe in themselves. They get
very involved in their own investments to the point that they gather tremendous
amounts of information about the investments and tend to drive their
investment managers crazy by their involvement and control, they feel that they
reduce risk to an acceptable level.

Item Explanation
Source Involved in the wealth creation and earned over their lifetimes
Risk Tolerance Taking higher tolerance for risk than security
Active vs. Passive Investors
Five-Way Model
The Adventurer
❑ People who are willing to put all money on one bet and go for it because
they have confidence.

❑ They are difficult to advise, because they have their own ideas about
investing. They are willing to take risks, and they are instable clients
from an investment counsel point of view.
The Celebrity
❑ These people like to be where the action is as they are afraid of being
left out. They really do not have their own ideas about investments.

❑ They may have their own ideas about other things in life, but NOT
investing, as a result they are the best target for financial broker.
The Individualist
❑ These people tend to go with their own way and are characterized by
the small business person or an independent professional, such as a
lawyer, doctor, or engineer.
❑ They are trying to make their own decisions in life, carefully and
having a certain degree of confidence about them, but also being
careful, methodical, and analytical.
❑ These are “Rational investors” whom everyone is looking for,
specially portfolio manager can talk with them logically.
The Guardian
❑ Typically as people get older and begin considering retirement, they
approach this personality profile. They are careful and a little bit
worried about their money.
❑ They recognize that they face a limited earning time span and have to
reserve their assets. They are definitely not interested in volatility or
excitement.
❑ Guardians have a lack confidence in their ability to forecast the future
or to understand where to put their money, so they look for direction.
The Straight Arrow
❑ These people are well balanced, they cannot be placed in any specific
quadrant, so they fall near to the center.

❑ This group of clients are the average investor, a relatively balanced

❑ With some suggestion a Straight Arrow investor might be willing to