Beyond Behavioral Finance
Behavioral finance has helped identify the key cognitive shortcuts we tend to take when making decisions while armed with limited information and faced with time pressure, such as in times of volatile market conditions. The rapidity with which a decision to buy or sell needs to be made causes even professionals to resort to inherent biases when deciding. It’s these shortcuts that lead to:
- Following the herd, assuming it knows where we want to go better than we do.
- Avoiding decisions in order to sidestep the potential for loss or the feeling of regret that could follow.
- Framing new information or market conditions based on previous experience, essentially doing what every financial disclosure document warns against: basing future performance on past results.
While these behavioral motives certainly exist, they do not fully explain how investors still manage to choose poorly, even when they are not suffering from time constraints and have access to a plethora of information.
The Paradox of Choice
In “The Paradox of Choice: Why More Is Less,” psychologist Barry Schwartz offers another take on choice. The chief paradox he refers to has to do with the ever-expanding number of choices we face, from 30 different types of cereal to 401(k) plans with seemingly infinite combinations of investment options to choose from. For many of us, the paradox is that as our options for customization and access to information increase, our ability, willingness and delight in being able to choose declines, often to a point of defaulting to what others are doing or simply avoiding a decision because it entails too much work.
Schwartz also observes that often when a choice is made, we feel disappointed. After all, when you are faced with so many options, you feel that you shouldn’t just get good results from a well-thought-out decision—you should get perfect results.
Overcoming the paradox of choice is not insurmountable. Think about your first visit to a Starbucks and being overwhelmed to the point of shyness by all the choices. Yet, this morning, you rattled off a very specific order that seemed to be second nature...a half-caf, no-whip, skim latte easy on the cream, anyone?
But, the higher the complexity of a decision and, more importantly, the higher the stakes, the more fearful people will be of getting it wrong. Making a poor choice on a coffee order is irritating, but it isn’t like getting the asset allocation wrong on a retirement plan and risking a diet highly dependent on leftovers when you are in your eighties.
Schwartz suggests that successfully navigating choice comes down to developing an understanding of what you want—what you really want—and becoming educated regarding the options for achieving that goal. It is a process that takes time, and taking some time to think things through is also a key to overcoming our personal biases.
Where Good Marketing Can Help
As marketers of complex, high-stakes products and services—the kind that tend to trigger the paradox of choice—it is our job to help people overcome their fears, doubts and inertia to make good decisions about what we are selling. We can do that by helping move our ultimate consumers through the process of good decision-making. Here’s how:
- Articulate the objectives that your product or service addresses to help investors visualize their own “what’s in it for me.” Help them understand how what you offer closes the gap between where they are now and where they want to go.
- Make the complex simple to understand. It isn’t about the features. An investor needs to understand how investing in the product or engaging the service can enhance their spending power in retirement.
- In financial services, we can’t help but raise the fear factor if we are to be in compliance. The only thing more fear-inducing than financial disclosure is the disclaimer that accompanies most prescription drugs. This is why choices need to be presented within the context of what the investor specifically needs to reach their goals.
- Understand that logic isn’t enough; emotion will still rule. This is why a comparison chart is not enough—it’s not the mind alone you appeal to but the heart as well.
- Make them feel good about their decision. There is a tendency to remember an experience in terms of how it ended. Research on this point says that even bad experiences are later remembered as good experiences if they ended on a higher note. For instance, a vacation that was characterized by four days of rain but ended with sunshine and a beautiful sunset will be remembered with greater fondness than one that ended with a day of rain after four days of sunshine.
- Get the measurement right. When investors turn to you, they expect better-than-market results. The more information and tools you have at your disposal, the greater the expectations may be. This is why performance discussions and the measurement of success shouldn’t just be linked to quarterly index comparisons. They should be linked to the progress that was made toward realizing individual goals. This element brings performance back into the personal realm and leads to a more direct and emotional connection for the client.
 Barry Schwartz, The Paradox of Choice: Why Less Is More, Harper Perennial, Jan. 18, 2005.
 Cass R. Sunstein and Richard H. Thaler, Nudge: Improving Decisions about Health, Wealth, and Happiness, Yale University Press, April 8, 2008.
 Benjamin Scheibehenne, Rainer Greifeneder, and Peter M. Todd, “Can There Ever Be Too Many Options? A Meta-Analytic Review of Choice Overload,” Journal of Consumer Research, Vol. 37, October 2010.
 Ning Tang and Olivia Mitchell, “The Efficiency of Pension Plan Investment Choices in Defined Contribution Plans,” University of Michigan Retirement Research Center, June 2008.