7 Behavioral Science Lessons on Communication
Choice architecture – a behavioral science application that includes things like automatic enrollment – works, but it is not the entire solution to worker savings behavior.
That was one of the points made by Dr. Julie Agnew, Associate Professor of Finance and Economics at William & Mary at this week’s ASPPA Annual Conference.
Agnew noted that while such things can “work” in terms of things like producing beneficial results, those with low financial literacy or who experience information problems may be more susceptible to behavioral biases, and that participants must understand their choices or later on they may regret their action (or inaction).
In her session, “Behavioral Economics and Effective Employee Communications: Lessons from Academia,” Agnew shared the results of a an experiment where she co-authored a study that examined the choice between an annuity and a lump sum, and found that individuals that experienced information overload were 30% less likely to feel confident about their choice. Moreover, the 2011 study found that, controlling for final payouts, those with more information overload were also less likely to be satisfied with their decision when the game was complete – and that those with low financial literacy were more likely to be overwhelmed by the information presented to them.
Indeed, Agnew noted that too much information can cause participants to disengage from decision making and be less satisfied later on.
Don’t Assume Knowledge
Agnew further explained that one should not assume participants understand their plan features or general finance. She advised using survey assessments and focus groups to understand what your participants know and do not know – and once that is established, tailor communications to that participant base and their knowledge. But communication material should be tested for understanding
Another example cited was a situation where Professors Benartzi and Thaler observed that employees at the University of Chicago thought that they could only invest in four funds – and then they noticed that the election form only had four lines, though more options could be chosen – by expanding the apparent ability to have more choices, more choices resulted. Even subtle changes to how decisions are presented can have a large impact on investor behavior, Agnew noted.
How choices are ‘framed’ can also influence decisions. Agnew explained that “prospect theory” holds that individuals weigh losses greater than gains, and thus things like the annuity decision can be framed to either favor the “annuity option” or the “investment option.” For those who lean toward annuities, the decision might be best framed by emphasizing the “loss” from outliving resources through the investment option, while those who favor investments might be best framed by emphasizing the “loss” from purchasing an annuity and dying soon after.
Look Beyond Finance
Agnew suggested that it would pay to look outside finance for ideas regarding how to effectively communicate complex. For example, she noted studies that showed that individuals may be helped to reach their goals by breaking down the task into subtasks, providing realistic estimates of the time to complete each task, and providing instructions.
But, perhaps most significantly of all, Agnew’s seventh lesson was that one size doesn’t fit all when it comes to behavioral finance. She explained that Temporal Construal Theory predicts that individuals tend to view things differently whether the event is in the near or distant future – and that meant that while for older individuals retirement might be close (and thus concrete communications would be effective), whereas for younger individuals communications about a distant event like retirement would be more effective it they were abstract. One way to change that is to reposition a distant event (like retirement) with a close event (like how much you should save in your next paycheck).
The Seven Lessons
Ultimately, Agnew explained that successful communication requires:
You'll find our other coverage of the 2015 ASPPA Annual Conference in the Conferences "station" on ASPPA Net.
- Recognizing that communication matters (Lesson One)
- Avoiding information overload (Lesson Two)
- Understanding the knowledge level of the participants to determine what to communicate (Lesson Three)
- Careful attention to even the most subtle details (Lesson Four)
- Using framing to promote sound investment behaviors (Lesson Five)
- Taking advantage of successful communication strategies from different fields (Lesson Six)
- Customizing the communications to target different demographic groups to increase the efficacy of the messaging (Lesson Seven)