Barnewall Two-way Model

The Barnewall Two-way Model, also known as the Barnewall Two-way Behavioral Model, is an investor psychographic profiling model as well as a behavioral finance model which is a comprehensive, in-depth analysis to demonstrate the thought process behind how investors behave in terms of wealth accumulation trajectory. The model summarizes aspects of how investors behave considering the circumstances they deal with, such as their economic background, and how they can capitalize on their skill levels to earn money and gain sufficient wealth in order to survive in society and cope with the dynamic situations that could arise due to various macroeconomic factors, such as inflation. It is considered one of the oldest psychographic profiling models that is still prevalent, and it is still considered relevant as the model has been included in higher education at several universities.

Barnewall Two-way model was initially conceptualized and proposed by Marilyn MacGruder Barnewall in 1987 in an academic paper titled Psychological Characteristics of the individual investor. The model classifies and distinguishes investors mainly into two main broad categories namely passive investors and active investors. The model is also termed as an investors classification model but the model was later criticized by experts for being outdated and the model does not take into calculation about the hybrid factor.

Type of investors

Passive investors

The Barnewall Two-way model depicts passive investors as those who are passively wealthy, whereas passive investors do not incur any risk from their end whatsoever as they benefit by working for others. Passive investors do not risk their own capital as they work under others in pursuit of salary and bonuses. However, there is no guarantee that passive investors can have the ability to enhance their level of independence, and they will not be able to make their own decisions as they always have to depend on what their superiors instruct and act accordingly. Passive investors do not have the bargaining ability to make crucial decisions as they work under bosses on a contractual basis and are obliged to comply with the terms and conditions set by their employers. Passive investors tend to exhibit behavior tilting towards being risk-averse and they are not willing to take proactive calculated and premeditated risks in terms of their career prospects. Passive investors tend to seek external approval when taking key policy decisions. Their wealth has been created and accumulated in a steady and safe manner. Generally it is perceived and assumed that people who have fewer economic resources and especially those who have little to no access to even basic facilities tend to become passive investors. This is due to the fact that people who have fewer economic assets would tend to have a higher emotional need for security. Bankers, lawyers, doctors, journalists are the category of people who would fall under this category.

Active investors

The Barnewall two-way model depicts active investors as those who are willing to take calculated risks by risking their own capital, and they have the luxury of making their own investment decisions at their disposal in an independent manner. Generally, it is perceived and assumed that people who have access to more economic resources tend to take the route of being active investors since they have the luxury of dictating their own terms and conditions. Active investors gain wealth and accumulate wealth by expanding their skillsets and innovative novelties, and therefore they are not in a position to seek clarity from anyone since they motivate themselves to maintain their standards and they would push their case to make their own identity in society. Active investors establish themselves as risk lovers and for example they would brace themselves to invest in a risky investment like investing their money in the stock market. They also tend to show their eagerness and curiosity to obtain relevant available information about their investments to establish a feeling of authority and control. They in fact prioritize higher tolerance for risk compared to emotional need for security. Entrepreneurs, business tycoons fall under this category.

Limitations and drawbacks

• Many individuals may portray and exhibit characteristics of both active investors and passive investors groups, thereby casting doubts and sparking confusions, dilemmatic situations under which group such individuals can be classified.
• Investors may tend to act in an irrational and unpredictable fashion owing to mood swings and emotions due to the situations.
• Experts indicate that classifying investors only as active and passive only lead to a shortsighted mindset, because practitioners of modern behavioral finance believe that investors can be of many types.

See also

• Bielard, Biehl and Kaiser five-way model
• Behavioral economics
• Investor profile