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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 an...
Areas of research


Behavioral decision theory




Cognitive psychology




The study of how people decide, and what ...
Why financial decision making is difficult

7 REASONS
7 reasons: reason 1

AMBIGUITY
The future is unknown







Health
Financial situation or needs
Cost of living
Performance of investments/markets
St...
It’s a gamble


No guarantee that what we save today
will ever come back to us
7 reasons: reason 2

TEMPORAL DISTANCE
The future





Ability to envision the future depends
on how far away it is
The distant future is abstract
Hard to pla...
7 reasons: reason 3

NO DEADLINES
Easy to procrastinate



No definitive deadlines
Saving is easily postponed without
immediate penalty
7 reasons: reason 4

INERTIA
Inertia




Hard to get started
Easy to maintain status quo
Aversion to ‘work’ or effort
Inertia
7 reasons: reason 5

THE REWARD SYSTEM
Action / consequence



When I save, I incur pain today
When I don’t save, I get rewarded
today!
7 reasons: reason 6

CHOICES
Choices



Limited financial domain knowledge
Too many choices





Need to make the right choice
Fear of making the ...
Paralysis


Paralysis leads to no choice
7 reasons: reason 7

OVERCONFIDENCE
Above average


People are inherently confident and
optimistic
Bottom line


It’s really hard to make good financial
decisions!
How people evaluate options and decide

4 TRUTHS
How people assess value

COMPARISON
Compelling comparison
You need a loan…
No comparison required
Saving for retirement
Designing for comparison
Graphical comparison
Toothpaste A

Toothpaste B

0

5

10

15

20

25

30

35

Number (per 5000) suffering serious gum dis...
Graphical comparison

Toothpaste A
30 out of 5000

Toothpaste B
15 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?
Perception of

GAIN V. LOSS
Loss is painful
‘Painless’ saving
The reference point
Gain/Loss & UX Design



The reference point defines gain/loss
Minimize the pain of loss
How something is presented

FRAMING
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
Secon...
Movie rental
Example 1
Cost/month

New movies/week

Plan A

$10

7

Plan B

$12

9

Cost/month

New movies/year

Plan A

$...
Framing & UX Design




Most things can be framed in various
ways
The frame itself affects perception and
decision outco...
Important

People do not reframe
What captures attention

SALIENCE
Salience

obvious
Distinctive
prominent
Would you visit?
Salience
Graphical scale

Two scholarships are available to you. You
prefer to get a scholarship with less waiting
time and more mo...
Ubiquitous financial info

The non-stop flow of information makes people use their apps and tools
more. Human brains are w...
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


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  1. 1. Financial Decision Making 7 Reasons & 4 Truths Face of Finance 2013 Colleen Roller
  2. 2. This presentation   7 reasons why financial decision making is difficult 4 truths about how people evaluate options and decide
  3. 3. Areas of research  Behavioral decision theory   Cognitive psychology   The study of how people decide, and what affects the decision making process and decision outcomes The study of how people perceive, think, remember and learn Usability & UX Design  The science/art of creating successful design experiences
  4. 4. Why financial decision making is difficult 7 REASONS
  5. 5. 7 reasons: reason 1 AMBIGUITY
  6. 6. The future is unknown      Health Financial situation or needs Cost of living Performance of investments/markets State of the world/economy
  7. 7. It’s a gamble  No guarantee that what we save today will ever come back to us
  8. 8. 7 reasons: reason 2 TEMPORAL DISTANCE
  9. 9. 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
  10. 10. 7 reasons: reason 3 NO DEADLINES
  11. 11. Easy to procrastinate   No definitive deadlines Saving is easily postponed without immediate penalty
  12. 12. 7 reasons: reason 4 INERTIA
  13. 13. Inertia    Hard to get started Easy to maintain status quo Aversion to ‘work’ or effort
  14. 14. Inertia
  15. 15. 7 reasons: reason 5 THE REWARD SYSTEM
  16. 16. Action / consequence   When I save, I incur pain today When I don’t save, I get rewarded today!
  17. 17. 7 reasons: reason 6 CHOICES
  18. 18. Choices   Limited financial domain knowledge Too many choices    Need to make the right choice Fear of making the wrong choice My needs are unique
  19. 19. Paralysis  Paralysis leads to no choice
  20. 20. 7 reasons: reason 7 OVERCONFIDENCE
  21. 21. Above average  People are inherently confident and optimistic
  22. 22. Bottom line  It’s really hard to make good financial decisions!
  23. 23. How people evaluate options and decide 4 TRUTHS
  24. 24. How people assess value COMPARISON
  25. 25. Compelling comparison
  26. 26. You need a loan…
  27. 27. No comparison required
  28. 28. Saving for retirement
  29. 29. Designing for comparison
  30. 30. Graphical comparison Toothpaste A Toothpaste B 0 5 10 15 20 25 30 35 Number (per 5000) suffering serious gum disease E.R. Stone et al. 2003
  31. 31. Graphical comparison Toothpaste A 30 out of 5000 Toothpaste B 15 out of 5000 E.R. Stone et al. 2003
  32. 32. Comparison and UX Design    Are you designing for comparison? What is the reference point? What is salient?
  33. 33. Perception of GAIN V. LOSS
  34. 34. Loss is painful
  35. 35. ‘Painless’ saving
  36. 36. The reference point
  37. 37. Gain/Loss & UX Design   The reference point defines gain/loss Minimize the pain of loss
  38. 38. How something is presented FRAMING
  39. 39. Framing  Which would you prefer?   Meat that is 90% fat free Meat that is 10% fat
  40. 40. 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
  41. 41. Movie rental Example 1 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 Example 2 Burson, Larrick, Lynch 2009
  42. 42. Framing & UX Design   Most things can be framed in various ways The frame itself affects perception and decision outcomes
  43. 43. Important People do not reframe
  44. 44. What captures attention SALIENCE
  45. 45. Salience obvious Distinctive prominent
  46. 46. Would you visit?
  47. 47. Salience
  48. 48. 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
  49. 49. 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.
  50. 50. Salience & UX Design    Makes info concrete Drives attention/focus What is most salient in your design?
  51. 51. 4 powerful truths Attention & focus Perception & meaning Decision outcomes
  52. 52. The design matters There is no neutral design
  53. 53. Equal length?
  54. 54. Equal length?
  55. 55. Context matters
  56. 56. 7 reasons & 4 truths  Colleen Roller  UXmatters.com UX magazine (uxmag.com)  croller520@gmail.com 
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