How to Use the ‘Science of Motivation’ to Inspire Clients

Feb 26th 2016
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For years, the best minds in behavioral science and economics – researchers and writers like Richard Thaler, Daniel Kahneman, Daniel Pink, and Malcolm Gladwell – have collectively raised a big neon sign that reads: “The way we think people make decisions – and, therefore, the way we motivate people – is wrong.”

And for decades, said personal financial planning expert Tim Maurer, the financial services industry has driven right past that warning, opting instead to fall back on its all-too-comfortable carrot-and-stick motivation model – a motivation system that science passed by long ago.

“Today, we know all people have a natural aversion to being compelled to do something by an outside force. Research supports the fact that people prefer to develop their own autonomous plans,” said Maurer, director of personal finance for the BAM Alliance. “Yet, the financial services industry is still stuck telling people what to do and how to do it, without ever ensuring they understand why.”

But there is good news for financial planners who would like to learn how to harness the “science of motivation” to better serve their clients, Maurer recently told an audience of advisors at the 2016 American Institute of CPAs Advanced Personal Financial Planning Conference.

The keys to learning how to use behavioral science to help clients unlock the motivation needed to determine and meet their financial goals are fairly simple, Maurer said. When advisors incorporate these principles into their financial planning practices, the results can be transformative for clients and advisors alike.

“As Richard Thaler, one of the forefathers of modern behavioral economics, told me personally, ‘You can’t do your job well unless you understand how your clients think,’” Maurer said.

The first step for advisors who want to develop a practice centered on client autonomy instead of advisor dictates is to develop a fundamental understanding of the psychology behind how people make their most basic decisions, including financial decisions.

That working knowledge, Maurer said, should include a basic understanding of the following behavioral science and economic theories.

“System 1” vs. “System 2” thinking. According to Nobel Prize-winning psychologist Daniel Kahneman, people make up to 80 percent of their financial decisions with their emotional “System 1” (the instinctual, fast-thinking brain), then they use their more thoughtful “System 2” (the slower, logical brain) to rationalize the decisions they’ve just made.

However, this doesn’t mean clients and advisors should suppress or ignore those emotional System 1 motivators involved in money decisions simply because they are fast-thinking decisions. Rather, they should recognize their impulses and even apply them to good effect by synthesizing the might of emotion (System 1) with the deliberation of intellect (System 2).

“You can” always trumps “you should.” Decades of behavioral research shows that people are more driven by their own intrinsic motivation – the idea that they have the option to choose their path, as opposed to being directed or goaded into doing something. Advisors should leverage this “you can” philosophy by ensuring that all recommendations are tailored to their clients’ well-articulated values and goals.

The endowment effect: less pain over greater pleasure. The endowment effect suggests that people may overvalue what they already possess and undervalue what they do not. This leads to the theory of risk aversion – the idea that losses hurt more than gains encourage. Losing money, in other words, causes people more pain than making money produces pleasure. This theory suggests advisors should err on the side of conservatism in planning and investing, according to Maurer.

Recency bias. Recency bias leads people to overvalue what happened recently in their expectations for the future. For example, the stock market’s extreme volatility since 2008 has left investors with a more pessimistic view of investing than a longer view would suggest is appropriate. Of course, Maurer said, we also saw “irrational exuberance” in the late 1990s as investors grew to count on unrealistic expectations of future returns based on what their most recent experience had been.

Hyperbolic discounting. Behavioral scientists believe this thinking leads people to undervalue something they’ll receive later relative to something they’ll receive sooner. This syndrome is no less evident than in retirement planning because future needs seem to pale in importance to the needs of today.

Confirmation bias. This faulty logic leads people to reach conclusions that they’d prefer over those that are most likely. A dangerous form of this bias is seen in investors who engage in day trading and experience momentary success. “I’m a stock-picking genius! I should do this with more of my money.”

In general, helping clients recognize those biases that are common to all – while discerning their more unique individual manifestations – brings the arcane science into the practical realm, Maurer said.

Once advisors have familiarized themselves with the theories behind the science of motivation, Maurer offers three pieces of advice for those hoping to incorporate this science into their practices.

1. Know your stuff. “Personal finance is more personal than it is finance,” he said. “Consider your understanding of behavioral finance as just as, if not more, important than understanding asset allocation or capital-gain tax treatment.”

2. Become comfortable with “evoking, not avoiding, clients’ emotions.” Advisors should ensure that recommendations facilitate autonomy and are truly generated from the client’s values and goals, not their own.

3. Simplify everything about your practice. “Complexity tires the brain and weakens the resolve we hope our clients will find,” Maurer said. For example, a client should never have to provide her basic information – address, date of birth, Social Security number, or even how she takes her coffee – more than once. Similarly, financial plans, in whatever form, and even quarterly reports should be shortened and distilled to the greatest degree practical.

“Clients come to us for guidance, not to learn everything we know,” he added.

Maurer acknowledges it may still take some time for the science of motivation to become a de rigueur part of the financial planning process, but for the relative few planners who have already adopted the science, it has been a game-changer because the implications of this research “stands in stark contrast with the longstanding norms of financial advice.”

Those with the “eyes to see,” Maurer said, have already begun to notice the influence of behavioral science in “unexpected places.”

“Many 401(k) providers, for example, have limited the number of investment options in their plans and moved to an opt-out default system, which automatically enrolls new employees in the corporate retirement plan unless they opt out,” Maurer said. “Both of these changes reflect the wisdom in Thaler and [Cass] Sunstein’s book, Nudge. As individual advisors and firms, however, we have an opportunity to innovate our practices well-ahead of the broader industry.”

Related article:

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Brett Layton, CPA
By bltaxes
Feb 28th 2016 14:16 EST

Nice article, but we do need to know the technical stuff and the human motivational side as well. What is priceless here is the statement that clients come to us for guidance not to learn everything we know. As a teacher and academic junky I sometimes forget this.

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By maincpa77
May 11th 2017 21:46 EDT

I was reading your Madden Mobile hack article and wondered if you had considered creating an ebook on this subject. Your writing would sell it fast. You have a lot of writing talent.

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