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Financial Decision Making 7 Reasons & 4 Truths
Face of Finance 2013
Colleen Roller
This presentation
7 reasons why financial decision making is difficult
4 truths about how people evaluate options and decide
Areas of research
Behavioral decision theory The study of how people decide, and what affects the
decision making process and decision outcomes Cognitive psychology
The study of how people perceive, think, remember and learn
Usability & UX Design The science/art of creating successful design experiences
7 REASONS Why financial decision making is difficult
AMBIGUITY7 reasons: reason 1
The future is unknown
Health Financial situation or needs Cost of living Performance of investments/markets State of the world/economy
It’s a gamble
No guarantee that what we save today will ever come back to us
TEMPORAL DISTANCE7 reasons: reason 2
The future
Ability to envision the future depends on how far away it is
The distant future is abstract Hard to plan for the abstract
NO DEADLINES7 reasons: reason 3
Easy to procrastinate
No definitive deadlines Saving is easily postponed without
immediate penalty
INERTIA7 reasons: reason 4
Inertia
Hard to get started Easy to maintain status quo Aversion to ‘work’ or effort
Inertia
THE REWARD SYSTEM7 reasons: reason 5
Action / consequence
When I save, I incur pain today When I don’t save, I get rewarded
today!
CHOICES7 reasons: reason 6
Choices
Limited financial domain knowledge Too many choices
Need to make the right choice Fear of making the wrong choice
My needs are unique
Paralysis
Paralysis leads to no choice
OVERCONFIDENCE7 reasons: reason 7
Above average
People are inherently confident and optimistic
Bottom line
It’s really hard to make good financial decisions!
4 TRUTHSHow people evaluate options and decide
COMPARISONHow people assess value
Compelling comparison
You need a loan…
No comparison required
Saving for retirement
Designing for comparison
Graphical comparison
Toothpaste B
Toothpaste A
0 5 10 15 20 25 30 35
Number (per 5000) suffering serious gum disease
E.R. Stone et al. 2003
Graphical comparison
Toothpaste A30 out of 5000
Toothpaste B15 out of 5000
E.R. Stone et al. 2003
Comparison and UX Design
Are you designing for comparison? What is the reference point? What is salient?
GAIN V. LOSSPerception of
Loss is painful
‘Painless’ saving
The reference point
Gain/Loss & UX Design
The reference point defines gain/loss Minimize the pain of loss
FRAMINGHow something is presented
Framing
Which would you prefer? Meat that is 90% fat free Meat that is 10% fat
Rates of return
Choose between two investment funds – stocks v. bonds First group shown 1-yr rates of return Second group shown 30-yr rates of return
Benartzi/Thaler, 2001
Movie rental
Cost/month New movies/week
Plan A $10 7
Plan B $12 9
Cost/month New movies/year
Plan A $10 364
Plan B $12 468
Burson, Larrick, Lynch 2009
Example 1
Example 2
Framing & UX Design
Most things can be framed in various ways
The frame itself affects perception and decision outcomes
Important
People do not reframe
SALIENCEWhat captures attention
Salience
Distinctive
prominent
obvious
Would you visit?
Salience
Graphical scale
Two scholarships are available to you. You prefer to get a scholarship with less waiting time and more money. Of the two scholarships depicted, which one would you prefer?
Sun, Li, Bonini 2010
Ubiquitous financial info
The non-stop flow of information makes people use their apps and tools more. Human brains are wired to process, evaluate and react to information, and the more data fed to your brain about your investments, the more likely you are to react, when just standing there would be better. Investors need to know that accessing their financial information all the time will break down their investment discipline and undermine their long-term plan.
Salience & UX Design
Makes info concrete Drives attention/focus What is most salient in your design?
4 powerful truths
Attention & focus
Perception & meaning
Decision outcomes
The design matters
There is no neutral design
Equal length?
Equal length?
Context matters
