Samantha Lamas is a behavioral researcher at Morningstar Investment Management, and Ryan Murphy, Ph.D., is Morningstar’s head of Decision Sciences. They spoke with Hannah Moore, CFP®, about their award-winning research and the tool they developed to help financial planning professionals create a clear plan for their clients’ goals, so they can make advised and rational decisions. Be sure to earn .5 hours of CFP Board CE Credit with this episode!

The science of emotional investing

Ryan and Sam work in an area of the profession where human nature and market science intersect. In their latest project, a nation-wide study that won the 2020 Montgomery-Warschauer Award, they tackled a complex question: Why do investors say they want one thing, but pursue other courses of action?

Their team’s initial search led them to the literature on cognitive blind spots, the ways that people become blind to mistakes they are making. As they researched further, they discovered that these well-established patterns in behavior science were wreaking havoc in financial planning conversations.

What are a client’s overarching financial goals? It seems like a really straightforward question, Ryan explains, and most clients and investors think they know the answer. But Sam and Ryan actually found that, often, they don’t know the answer, and will just say something that “pops into their head.” This is a problem for the profession and the people trying to serve these clients. Why? Because, when an investor tells their financial planner that their biggest goal is something that popped to mind at the spur of the moment, it can lay the groundwork for a frustrating relationship.

One of their project’s first findings was that the financial goals people list off the top of their heads aren't the same as the ones they come up with after five or 10 minutes of reflection. The deeper insight is almost always a more reliable and useful answer. So, this team of researchers set out to help financial planners find ways to get the actual answer so they can serve their clients better.

The award-winning study

Along with their teammate Ray Sin, Ph.D., Ryan and Sam developed and tested a three-step technique to help investors become more aware of their true financial goals. The experimental approach was centered on a simple checklist that helped clients slow down and consider the full range of possibilities, then choose investment objectives that were truly compelling and personally meaningful.

The team’s paper, “Goals-Based Financial Planning: How Simple Lists Can Overcome Cognitive Blind Spots,” was published in the Journal of Financial Planning.

Ryan says, “A lot of the research is based on the assumption that people are perfectly rational. But that just isn't the case.” The team hoped that by using the checklist system, financial planners would be able to help their clients make better decisions.

Cognitive biases: mental shortcuts that can derail investing goals

Cognitive biases are hard-wired thinking patterns that evolved to help us filter information and make decisions quickly. Unfortunately, they can be problematic when we’re attempting to make long-term plans.

Ryan says, “Our brains are not designed for long-term investing. It requires us to delay consumption, exercise patience, and embrace uncertainty, all things our brains are not wired to like.”

Knowing that being an investor is not easy, Ryan suggests that you acknowledge that and focus on your client’s deepest motivation. Get them to ask themselves, “Why am I putting myself through this?” Finding a strong emotional motivation can help them stay grounded when common cognitive biases threaten to derail their goals.

Some common cognitive biases include availability bias, where we say the first thing that comes to our head and then can’t see past it, and recency bias, where we feel like recent events are automatically more telling than lessons from the past. Others include confirmation bias, where we cannot process information that goes against our current beliefs, and overconfidence, where we feel unjustifiably confident in an unexamined belief.

All of these errors in thinking can cause investors to cling to an idea or make a decision that goes directly against their goals or best interests. Another bias that is important in financial planning is hyperbolic discounting, where we are much more compelled to chase a reward now than to work towards one in the future.

All of these biases can make it difficult for clients to give you a straight answer about their financial goals, but Ryan and Sam’s study found a simple tool to get your planning conversations back on track.

A financial tool to overcome cognitive bias

Sam and Ryan’s team developed a three step technique for interviewing clients, centered on a checklist of financial goals. In the first step, you ask the client, “What are your top three financial goals?” and you record what they say off the top of their heads.

In the second step, you give the client a checklist of investing goals and ask them to check off the ones that are important to them. These are goals that the researchers collected from other academic, industry and media publications. It contains a mix of short-term and long-term goals, as well as goals that are more objective and goals that are more emotionally based.

In the last step, you give the client a master list, including the goals that they listed out in the first two steps, and ask them once again to rank their top three financial goals.

In the study, about 70% of people changed at least one of their top three goals and the final answers tended to be more specific, actionable, and compelling than the original ones.

The bottom line on achieving goals with emotional investors

So… the question is: How can you help real people who are not perfectly rational make rational and productive investing decisions?

Ryan says, “When you ask clients what they want, they can give you answers, but you should be skeptical. It turns out to be a really hard question.” Knowing they may have trouble expressing their wants and values, have a goal-centric process in place like the three-step technique so you can help your clients understand what they're trying to do and take actions today that will get them where they want to go in the future

What You’ll Learn:

  • How cognitive blind spots make all humans emotional investors
  • Why it’s so hard for clients to tell you their biggest financial goals
  • Why investors chase metrics that don’t match their goals
  • Why you should care about cognitive bias
  • How to build more powerful, actionable, and meaningful investment plans for your clients
  • The three steps to help clients identify their true goals

In this episode of YAFPNW, Hannah Moore, CFP®, Samantha Lamas, and Ryan Murphy, Ph.D. discuss:

Interested in following Sam and Ryan? Follow Sam on LinkedIn and Ryan on LinkedIn! You can also earn .5 hours of CFP Board CE Credit.