Sticking to our plans is a perpetual challenge. It’s true for all of us, and it’s equally true for our clients. Whether the plans relate to diet, exercise, turning off American Idol to read that book sitting on our side table or spending vs saving, maintaining focus on our resolutions is a universal issue.
Fortunately, the burgeoning area of behavioural economics is coming up with strategies to overcome the temptations and obstacles that deflect us and our clients from our plans. Behavioural economists such as Princeton University’s Daniel Kahneman, University of Chicago’s Richard Thaler and Yale University’s Robert Shiller have conducted in field experiments to test how people behave in the real world. They have found big gaps between the perfectly rational behaviour assumed by theoretical models and what actually happens.
While attending the American Economics Association meeting in early January, I had three conversations with leading academics concerning experiments to help people stick to their plans, including a conversation about an initiative that had tripled savings rates among employees at one company.
– MAKE THE BENEFITS OF LONG-TERM GOALS MORE REAL
Last year, the Wall Street Journal reported on a research study in which recent college graduates were shown photographs of themselves, digitally aged so they looked like their grandparents.
After some of the study participants spent a few minutes contemplating their photo, a questionnaire on savings intentions was put to all participants. Those who had spent time viewing their aged selves were willing to save twice as much for retirement as those participants who hadn’t seen themselves looking older – an example of what happens when you make the benefits of saving for retirement more vivid.
Another experiment currently underway is examining the impact of financial advisors spending 10 to 15 minutes asking clients questions about their lifestyle in retirement: what their day will look like, the leisure activities they’ll pursue, the restaurants they’ll enjoy, the travel and vacations they’ll go on.
Early results indicate that those clients who are asked to provide a detailed picture of their lifestyle are prepared to commit to more ambitious savings and investment plans and are more likely to stick to those plans than those who haven’t gone through this process.
– PROVIDE SHORT-TERM REWARDS ON THE WAY TO LONG-TERM GOALS
Another barrier to sticking to plans is the mismatch between short-term pain and long-term rewards. Being in cash during volatile markets provides short-term peace of mind but, for most clients, staying on the sidelines will make it impossible to hit their long-term goals. The enjoyment we get from splurging on expensive meals out or new clothes gives us a short-term payoff, but that same spending can sabotage clients’ ability to achieve their long-term goals.
Another experiment that’s showing promise links short-term rewards to desired behaviour. For example, clients can agree that if they stick to their savings plans, they’ll enjoy a long weekend away once a quarter or go south for an annual vacation. By tying short- and mid-term rewards to the right behaviour, clients find it easier to avoid the temptations that deflect them from their long-term plans.
– GET CLIENTS TO “PRE-COMMIT” TO PLANS
A third strategy relates to making commitments in advance of an actual decision. Using one simple technique, employees at one company have tripled their savings rates in slightly more than two years, from 3.5% to 11.6%.
They used the “save more tomorrow” plan, developed by Thaler and Cass Sunstein at the University of Chicago, which proposes tapping into people’s acknowledgement of the need to save more along with their tendency to procrastinate on actually doing so.
This program asks clients to commit to allocating 20%-40% of future salary increases and bonuses to their savings programs. By asking for a commitment today on something that will happen in the future, you increase the chances that people will buy into the right kind of behaviour.
You can read more about this plan online at www.chicagobooth.edu/capideas/summer02/savemoretomorrow.html
– IMPLEMENTING NEW STRATEGIES IN CLIENT INTERACTIONS
Let’s be clear: none of us can alter human nature or our clients’ instincts to do exactly the wrong thing. Those instincts are givens that we have to recognize as realities.
The good news is that you can work with your clients to address the gaps between what they want to do and know they should do on the one hand and their actual behaviour on the other.
A recent New York Times article outlines new research on how people can stick to their plans. It included such suggestions as:
– Setting a single, clear goal. Research shows that people have a finite amount of willpower. As a result, we have more success if we select one clear, high-impact objective rather than a laundry list of goals.
Clients who say that they need to cut back on frivolous spending on clothes and restaurants, keep better financial records and dramatically increase the amount they save have limited chances of achieving any of those goals.
Their odds of success go up dramatically if they select just one of those goals on which to focus. Their prospects go up even more if they’re able to articulate that goal in clear, concrete terms. Just as those looking to lose weight are better off to say they want to lose a pound a week rather than saying they want to “lose weight” or “eat healthier,” clients looking to change their financial habits should be encouraged to make their goal as specific as possible.
– Keeping track of progress. At one time, nutritionists had discouraged dieters from weighing themselves more than once a week so that short-term weight fluctuations wouldn’t cause discouragement. New research shows that this advice is wrong. Dieters who weigh themselves daily have greater success.
The same principle applies to progress on spending and saving. Websites such as www.mint.com allow people to track their spending; research with this website’s users indicates that once people start monitoring expenses, they actually reduce spending.
– Pre-commitments and frequent rewards. The New York Times article also reinforces the behavioural finance research on frequent rewards and making firm commitments.
On the issue of pre-commitments, a website launched by some Yale academics is testing the impact of outsourcing self-discipline. People set goals and then, via email to friends or a post on Facebook, commit to penalties if they fail to achieve those goals.
The more onerous the penalty, the better the result.
This topic is reminiscent of a conversation I once had with an advisor who had decided in January that this was going to be the year he made it to the gym three times a week. He gave his trainer 150 envelopes, each containing $50. He asked the trainer to lock these in a desk in the administration office and to return one of those envelopes each time the advisor showed up. For any day that he missed, the envelope was the trainer’s to keep.
Consider employing one of these approaches to help your clients achieve their long-term goals, whether it be building short-term rewards into their plans, taking the time to talk about their life in retirement or using the power of pre-commitments.
In doing so, you can harness findings from the field of behavioural economics to help your clients hit their goals and, in the process, add significant value to your client relationships.
Dan Richards is CEO of Client Insights (www.clientinsights.ca). For more of Dan’s columns and informative videos, visit www.investmentexecutive.com.
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