Financial decision making is difficult for 7 reasons: 1) ambiguity about the future, 2) temporal distance makes the future abstract, 3) lack of deadlines enables procrastination, 4) inertia maintains the status quo, 5) immediate rewards discourage saving, 6) too many choices cause paralysis, and 7) overconfidence. There are also 4 truths about how people evaluate options: 1) comparison to a reference point is needed, 2) losses loom larger than equivalent gains, 3) framing affects perception, and 4) salience draws attention. Good design can overcome these challenges by incorporating graphical comparisons, framing outcomes as gains, minimizing the pain of losses, and making important information prominent.

1. Financial Decision Making
7 Reasons & 4 Truths
Face of Finance 2013
Colleen Roller

2. This presentation


7 reasons why financial decision
making is difficult
4 truths about how people evaluate
options and decide

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. Why financial decision making is difficult
7 REASONS

5. 7 reasons: reason 1
AMBIGUITY

6. The future is unknown





Health
Financial situation or needs
Cost of living
Performance of investments/markets
State of the world/economy

7. It’s a gamble

No guarantee that what we save today
will ever come back to us

8. 7 reasons: reason 2
TEMPORAL DISTANCE

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. 7 reasons: reason 3
NO DEADLINES

11. Easy to procrastinate


No definitive deadlines
Saving is easily postponed without
immediate penalty

12. 7 reasons: reason 4
INERTIA

13. Inertia

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Hard to get started
Easy to maintain status quo
Aversion to ‘work’ or effort

14. Inertia

15. 7 reasons: reason 5
THE REWARD SYSTEM

16. Action / consequence

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When I save, I incur pain today
When I don’t save, I get rewarded
today!

17. 7 reasons: reason 6
CHOICES

18. Choices

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Limited financial domain knowledge
Too many choices


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Need to make the right choice
Fear of making the wrong choice
My needs are unique

19. Paralysis
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Paralysis leads to no choice

20. 7 reasons: reason 7
OVERCONFIDENCE

21. Above average

People are inherently confident and
optimistic

22. Bottom line

It’s really hard to make good financial
decisions!

23. How people evaluate options and decide
4 TRUTHS

24. How people assess value
COMPARISON

25. Compelling comparison

26. You need a loan…

27. No comparison required

28. Saving for retirement

29. Designing for comparison

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. Graphical comparison
Toothpaste A
30 out of 5000
Toothpaste B
15 out of 5000
E.R. Stone et al. 2003

32. Comparison and UX Design
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Are you designing for comparison?
What is the reference point?
What is salient?

33. Perception of
GAIN V. LOSS

34. Loss is painful

35. ‘Painless’ saving

36. The reference point

37. Gain/Loss & UX Design
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The reference point defines gain/loss
Minimize the pain of loss

38. How something is presented
FRAMING

39. Framing
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Which would you prefer?
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
Meat that is 90% fat free
Meat that is 10% fat

40. Rates of return
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Choose between two investment funds
– stocks v. bonds
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First group shown 1-yr rates of return
Second group shown 30-yr rates of return
Benartzi/Thaler, 2001

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. Framing & UX Design
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Most things can be framed in various
ways
The frame itself affects perception and
decision outcomes

43. Important
People do not reframe

44. What captures attention
SALIENCE

45. Salience
obvious
Distinctive
prominent

46. Would you visit?

47. Salience

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. 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. Salience & UX Design
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Makes info concrete
Drives attention/focus
What is most salient in your design?

51. 4 powerful truths
Attention & focus
Perception & meaning
Decision outcomes

52. The design matters
There is no neutral design

53. Equal length?

54. Equal length?

55. Context matters

56. 7 reasons & 4 truths

Colleen Roller

UXmatters.com
UX magazine (uxmag.com)

croller520@gmail.com
