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

7 reasons & 4 truths

Colleen Roller UXmatters.com UX magazine (uxmag.com)

croller520@gmail.com