©2015, College for Financial Planning, all rights reserved.

Session 15Economic, Political and Regulatory Impacts

Creating Your Executive Summary

Applying Behavioral Economic Concepts to Financial Planning

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMFinancial Plan Development Course

Start Recording

This class is being recorded so you may review it at a future time.

15-2

Get Out Your Crystal Ball

Economic, Political, and Regulatory ImpactsPlan Development #31

Why are we suggesting this be in your executive summary?

15-3

Brainstorming Time

Each student in the class should list one potential change on the horizon and the personal consequences the client could experience through an impact onthe plan you are developing.

15-4

Executive Summary Basic Information

1. Please rename and save the provided files (i.e., the cash flow and plan), adding your last name to the file name. This will help your instructor get feedback and grades back to you.

2. Email your cash flow and plan to your instructor. Grading may take up to a week since we consult with each other about acceptable answers.

3. If your submissions contain errors preventing you from receiving a passing score, they will be emailed back to you to amend. You have up to three attempts to pass (you lose 5% with each resubmission).

4. Once your executive summary receives a passing grade, we will schedule your oral presentation.

5. During your oral presentation you present and conduct a dialogue with the clients on 2-4 of your recommendations.

15-5

Last Two Classes

• Opportunity to share your cash flow with the class and receive feedback from the instructor and other students.

• Discuss specific calculations and get your cash flow “pre-approved.”

• Share one of your recommendations and receive feedback about the strength of your issue description, recommendation, and what the pros and cons are.

• Students will take turns sharing cash flow or recommendations.

• Helps you pass with your first submission!

15-6

Deadlines

• You have six months to complete the course from the date of the first class. Continuing beyond those six months requires another fee.

• CFP Board now requires educational requirements be submitted prior to the deadline for registering for the exam:o _________ is the last day to turn in your executive

summary if you wish to sit for the exam in ________. o You’ll have only one shot of passing if you turn it in this

late.• Work on your executive summary during the last two

weeks of classes:o Bring it to class for review. o Turn it in one week after course completes.

• Submit by ____________, which is the deadline if you want an opportunity to fix errors to pass.

15-7

Behavioral Economics

• Your executive summary format is designed based on behavioral economic concepts.

• Break down decisions by covering them one at a time and offering clients decision options of yes, no, defer, or explore.

• Help client identify issues and see theconsequences of not addressing the issue. We don’t solve problems we don’t know we have.

• Make recommendations clear and actionable so the client knows exactly what to do.

• Frame the decision by providing key characteristics to think about with advantages and disadvantages.

• Build trust by showing disadvantages.

• Provide your second best alternative so the client feels they have a choice and can discuss it with you. This helps in decision making.

15-8

What is Behavioral Economics?

The study of social, cognitive, and emotional factors in understanding the economic decisions of individuals.

See references and recommended readings at end of presentation.

15-9

What stops people from acting?

Lack of understanding

Lack of trust

Obstacles to overcome

15-10

Priming & Creating Expectations

What expectations are you creating if:

• meeting starts with what you and your firm provide?

• every review and statement starts with quarterly returns compared to indexes?

• pictures on wall show young people enjoying expensive vacations?

• magazines in your lobby highlight top 10 swindlers?

15-11

Framing Effect & Gain vs. Loss

• When interpreting unfamiliar information, humans look for a framework of similar experiences to make a decision. What framework are you giving them (e.g., advantages and disadvantages).

• How you ask a question or frame a statement may have more impact than the concept behind the question or statement.

“We project you will retire with 60% of your current income.”

“We project you will need to cut yourexpenses by 40% in retirement.”

15-12

Mere Exposure Effect

The more people hear about something, the morecomfortable they are and like it.• Explain problems and potential solutions others

have used as you discuss issues.

• Use confirmation skills to make sure client understands; have them repeat them back to you.

• Ask them to prioritize potential solutions so they have heard it a third time!

• Summarize it in writing before giving recommendation.

15-13

Confirmation Bias

We hear the details confirming our view and quickly forget or misinterpret the ones that conflict (both clients and advisors).

15-14

False Consensus Effect

Bobble Head Response!15-15

Optimism Bias

• The odds are in my favor that it won’t be me. Besides, the odds apply to other people.

• It will turn out anyway… There’s nothing wrong and there is no elephant in the room!

• Implications: Unless risks are stated, restated, vividly explored, and owned, there is a good chance that people will not choose solutions.

15-16

Ownership Bias

• People like their own ideas best and take more responsibility for implementing if they actively participate.

• Too much effort on their part and they won’t participate.

• Too little effort on their part and they won’t buy in.

15-17

Create Ownership

• Have clients describe the problems.• Show critical characteristics of potential

solutions and have them prioritize solution components.

• Let them prioritize, move goal cards, push buttons, rearrange cards, have the remote, etc.

15-18

To Combat Lack of Understanding

Confirmation Skills

• What components that I just described strike you as most important?

• How do you think this strategy would benefit you?

• Which of the drawbacks I described are of the most concern to you?

• Tell me what you think the consequences of not addressing this issue could be?

• Avoid the bobble head response!

15-19

Confirmation Questions

1. Just to make sure I communicated this correctly, could you tell me what you think I am suggesting and why?

2. What would the benefit of this be for you?3. How could these drawbacks impact you?4. What about this strategy appeals to you?5. What would the impact be on your life if

you don’t address this issue?

Practice creating and writing down this type of open-ended question!

15-20

Ambiguity Effect

• Give details to avoid the ambiguity effect and choose to continue status quo.

• Offer alternatives with pros and cons to aid decisions and avoid clients feeling trapped, which causes inaction.

15-21

Priming & Expectations

Before starting your presentation:

• What is your message about the client’s role in the meeting?

• What expectations are you setting?o Timing?o Level of detail?o Errors in content?o Decision-making

expectations?o Timing of questions?o Your ideas or

their ideas?

15-22

Loss Aversion

Present and use confirmation skills so people understand what they will lose by taking or not taking action.

15-23

Information Bias

• When clients ask for more information, do you know what they hope to learn?

• Why do you chase information that has no meaning?

• Why do clients ask for financial plan reruns over small errors or changes?

15-24

Hyperbolic Discounting

• Our brains don’t understand the difference between nominal and real money.

• Intellectually we understand inflation, but given choices, our brain relies on figures.

• So future value numbers in financial planning reports have little meaning to clients.

Hyperbolic Discounting

• Prefer smaller, sooner payoffs to larger, later payoffs

• People misjudge time frames consistently

15-25

Optimism Bias

• People tend to disregard probabilities when making decisions that involve a degree of uncertainty.

• The stronger the emotion related to outcome, the more likely probability is ignored.

• What does this imply about investment risk, disability planning, long-term care insurance?

• Even though addressed in the fact find, it should be revisited!

15-26

Critical Communication Skills• Listening• Empathy• Confirmation• Clarification• Leading clients

through the decision-makingprocess

• Summation• Painting the vision

15-27

Make it easy for clients to act!

• Make it easy to: o understando see your

trustworthiness• Remove obstacles – or

don’t put any more in the way!

15-28

Next Class

See the questions on the following slides to guide you through evaluating your own process and using

behavioral economic concepts, along with important references and resources. 15-29

Evaluate Your Process• Priming: What non-verbal

messages are being given prior to start of experience?

• Expectations impact: What client and advisor expectations exist and are created before you engage?

• Framing effect: Are you providing the context to consider the decision?

• Gain vs. loss & loss aversion: How is your data-gathering framed – gain vs. loss and which helps the client be more realistic?

• Mere exposure effect: What are you doing to create familiarity with problems and solutions?

• Confirmation bias: Have you consistently used confirmation skills to avoid this problem for both you and client?

• False consensus effect: Is your client really agreeing with you? Does your client think you are agreeing because you were silent?

• Illusion of transparency: What does the client think you understand about them?

15-30

Evaluate Your Process• Optimism bias: How are

you getting clients engaged in overcoming only good times bias? How can you help clients “own” probability to make it real?

• Ownership bias: How are you getting clients engaged in owning problems and solutions?

• Choice architecture: Have you designed the choices for solutions so it makes it easier for clients to choose?

• Hyperbolic discounting: What does the client think you understand about them?

15-31

References & ResourcesPriming

• Ariely, D. (2010). The Upside of Irrationality. New York: HarperCollins. Pg 246

• Bargh, J. A., and Pietromonaco, P. (1982). Automatic information processing and social perception: the influence of trait information presented outside of conscious awareness on impression formation. Journal of Personality and Social Psychology, 43, pp. 437–449.

Expectations Impact

• Chang, J. (2011). A case study of the “Pygmalion Effect": Teacher expectations and student achievement. International Education Studies, 4(1), pp. 198-201.

• Leonard Lee, Shane Frederick, and Dan Ariely. Try It, You'll Like It: The Influence of Expectation, Consumption, and Revelation on Preferences for Beer. Psychological Science December 2006 17: pp. 1054-1058.

Framing Effect

• Khaneman, D.; Tversky, A. (1984). Choices, values, and frames. American Psychologist  39 (4): pp. 341–350.

• Ariely, D., Loewenstein, G., & Prelec, D. (2005). Tom Sawyer and the construction of value. Journal of Economic Behavior & Organization, 60(1), 1-10. (Working paper version).

• Michael M. Pompian, 2012. Behavioral Finance and Wealth Management : How to Build Investment Strategies That Account for Investor Biases, second edition, pp. 143- 149.

Gain vs. Loss & Loss Aversion

• Daniel Kahneman & Amos Tversky, Prospect Theory: An Analysis of Decisions Under Risk, Econometrica 47 (1979): pp. 313-327.

Mere Exposure Effect

• Zajonc (1968) showed Chinese characters to people from one to 25 times, asking them to guess the meaning. The more they saw a character the more positive a meaning they gave.

• Miller (1976) showed people posters about stopping foreign aid up to 200 times. They were persuaded most by moderate exposure. After 200 exposures they reacted negatively to the message!

• Kunst-Williams and Zajonc briefly (1 ms) showed octagons to experimental participants. Although they were later unable to identify the octagons, their liking for the shapes increased.

15-32

References & ResourcesConfirmation Bias

• Michael M. Pompian, (2012). Behavioral Finance and Wealth Management : How to Build Investment Strategies That Account for Investor Biases second edition, Pg 63.

• Snyder, M. and Cantor, N. (1979), Testing Hypotheses about Other People: The Use of Historical Knowledge, Journal of Experimental Social Psychology, 15, 330-342

False Consensus Effect

• Marks, G. and Miller, N. (1987). Ten years of research on the false consensus effect: an empirical and theoretical review. Psychological Bulletin, 102, 72-90.

Illusion of Transparency

• Savitsky, K., & Gilovich, T. (2003). The illusion of transparency and the alleviation of speech anxiety. Journal of Experimental Social Psychology, 39, 618-625.

• Thomas Gilovich and Kenneth Savitsky, (Dec., 1999). The Spotlight Effect and the Illusion of Transparency: Egocentric Assessments of How We Are Seen by Others, Current Directions in Psychological Science , Vol. 8, No. 6, pp. 165-168 Published by: Sage Publications, Inc. on behalf of Association for Psychological Science

Optimism Bias (Valence Effect)

• Rosenhan, D.L. and Messick, S. (1966). Affect and expectation. Journal of Personality and Social Psychology 3, 38-44.

• Ownership Bias

• Norton, M. I., Mochon, D., & Ariely, D. The IKEA Effect: When Labor Leads to Love. Harvard Business School Marketing Unit Working Paper, (11-091).

• Ariely, D. (2010) The Upside of Irrationality. New York: Harper Collins pgs 91- 94 * 110.

Choice Architecture

• Selinger, E., & Whyte, K. P. (2010). Competence and trust in choice architecture. Knowledge, Technology, & Policy, 23(3-4), 461-482.

15-33

References & ResourcesAmbiguity Effect

• Frisch, D., & Baron, J. (1988). Ambiguity and rationality. Journal of Behavioral Decision Making, 1, pp.149-157.

Information Bias

• Baron, J., Beattie, J., & Hershey, J. C. (1998). Heuristics and biases in diagnostic reasoning: II. Congruence, information, and certainty. Organizational Behavior and Human Decision Processes, 42, pp. 88-110.

Hyperbolic Discounting

• Frederick, Shane; Loewenstein, George; O'Donoghue, Ted (2002). Time Discounting and Time Preference: A Critical Review. Journal of Economic Literature  40 (2): pp. 351–401.

• Acquisti, Alessandro; Grossklags, Jens (2004). Losses, Gains, and Hyperbolic Discounting: Privacy Attitudes and Privacy Behavior. In Camp, J.; Lewis, R. The Economics of Information Security. Kluwer. pp. 179–186.

Great Books:

• Airely, D. (2008). Predictably Irrational: The Hidden Forces That Shape our Decisions . New York: Harper Collins

• Airely, D. (2010). The Upside of Irrationality. New York: HarperCollins.

• Kahneman, D. (2011). Thinking, Fast and Slow. New York: Farrar, Straus and Giroux

• Pompian, M. M. (2012). Behavioral Finance and Wealth Management. Hoboken: Wiley Finance.

15-34

©2015, College for Financial Planning, all rights reserved.

Session 15End of Slides

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMFinancial Plan Development Course