Investor segmentation: how to improve current techniques by incorporating behavioural finance concepts?

This article proposes an improved model of individual investor segmentation. The approach employed consisted of a broad review of studies published in renowned journals in recent decades on the segmentation of individual customers of financial services and on factors that influence financial decision making. The new segmentation model proposed adopts a hybrid approach which combines demographic and psychographic variables that previous research revealed to be the most important. After being tested and improved through future quantitative research, this new model may contribute to the improvement of financial institutions' customer acquisition methods and the services they provide, of investors' selection of investments and of the regulations that currently govern the financial sector, in particular, those which regulate prior suitability verification of investors. The new segmentation model proposed here innovates by incorporating psychographic variables ('rationality', 'risk aversion', 'overconfidence' and 'optimism') from psychology and the increasingly recognised behavioural finance area.