the wisdom of “sleeping on” financial decisions · 1. why we are all “ferry boat captains.”...

UMD Personal Finance Seminar for Professionals – May 15, 2014

The Wisdom of “Sleeping On” Financial Decisions

Lois A. Vitt, Ph.D. Founding Director Institute for Socio-Financial Studies

lvitt@isfs.org

•  For 23 years, ISFS research has had a far-reaching impact.

•  Our multi-disciplinary approach has informed financial education and program evaluation worldwide. (See www.ISFS.org/publications)

•  ISFS applies behavioral and societal research concepts to actual (not only ideal) financial life circumstances: such as financial mistakes.

What We Do…

Today’s Seminar

Will focus on:

1.  Why we are all “Ferry Boat Captains.”

2.  What we prioritize in our lives and why.

3.  Some surprising realities about everyday financial decision-making!

4.  Strategies to help clients/students navigate difficult challenges (loss mitigation) and marketplaces (advertorials) more successfully.

Financial Professionals must…

ü  Create financial value for stakeholders, a particular community, and even society as a whole.

ü  Implement content in a practical manner.

ü  Be personally interesting and relevant; a program must be important, scalable and sustainable.

ü  Deliver better financial results over time.

“Ferry Boat Captains” must…

ü  Steer through competing social norms and human values.

ü  Carry clients and students from one life “shore” to another—sometimes through “bad weather.”

ü  Understand personal and social behaviors not just financial facts.

ü  Recognize that financial management is complicated, emotion-laden, we all make mistakes, and that we create our socio-financial reality.

1.  Understand LifeValues Principles.

2.  Know what clients/students value and why.

3.  Develop an awareness of societal trends and behavioral biases.

4.  Have a plan for meeting client/student needs where they are and want to be.

Tools Needed

Biases, fallacies, and Errors Ø  Status Quo

Ø  Confirmatory

Ø  Risk Aversion

Ø  Conformity

Ø  Over Confidence

Ø  Anchoring

Ø  Etc., Etc., Etc.

Human Faces Behind the Errors Ø  Fears and discomforts

Ø  Other emotions

Ø  Off-days

Ø  Life transitions

Ø  Impaired cognition

Ø  Mental and physical health

Ø  Distractedness

Life Priorities and Financial Decisions

•  Our psychological, social, and cultural environments influence everyone’s financial behaviors and decisions.

•  Recognize your own LifeValues, how you developed them and why.

•  What are your vulnerabilities?

•  Then learn how you can use Behavioral (and Social Influences) Strategies to improve your financial decision-making and help clients and/or students do the same.

Research Behind LifeValues Tools

1.  The decision making sciences. 2.  The psychology of Values: Personal,

Social, Physical, and Financial. 3.  Well-being, preference and choice,

satisfaction and happiness.

4.  Behavioral economics and behavioral finance: biases and errors.

5.  Marketing and advertising: how cultural environments influence all human behaviors.

Principle No. 1…

Ø  Financial decision-making is about all of one’s life.

Principle No. 2…

Ø One’s societal and family history influences every financial decision today.

Individuals Values – Needs – Wants – Shoulds

Financial Behaviors

Organizations Reference Groups Family Media

Culture

Subcultures

Social Status

Flows of Social Influence on Financial Behaviors

Source: LVitt 2008, 2013 based on Olson

Wants “I want”

Shoulds “I should”

Values “I value”

Needs “I need”

emotions

cognitions

SELF “I decide”

Decision Dynamics Model

Source: Schweig-Vitt2006,

Wants “I want”

Shoulds “I should”

Values “I value”

Needs “I need”

emotions

cognitions

SELF “I decide”

Financial Decision Dynamics Model

Source: ISFS, Vitt 2007, 2009, 2013

Social Influences

Social Influences

Social Influences

Social Influences

Principle No. 3…

Ø One’s LifeValues drives all of their important decisions, consciously or unconsciously.

Principle No. 4…

Ø One can consciously use their LifeValue system to make better choices and decisions.

Principle No. 5…

Ø One’s LifeValues system is life long.

Break…

What are Values?

Terminology

Beliefs, attitudes, and values are terms often used interchangeably In the previous slide:

•  The value is Liberty •  The belief is in a Nation/System

where individuals are free to pursue happiness, religious life, etc.

•  Patrick Henry’s attitude might be “I hate tyrants…”

Your LifeValues System

All LifeValues are Subjective and consist of what we think and feel about these dimensions of our lives.

•  Inner/Personal

•  Physical/Material

•  Relationships/Societal

•  Financial/Economic

Discomfort Comfort

Personal Values

Social Values

Financial Values

*Source: Lois A. Vitt.

Physical Values

LifeValues Model*

Personal Values …

Psychological •  Safety and Security

•  Autonomy and Control

•  Identity and Social Identity

Spiritual

Physical Values…

1.  Internal

•  Senses

•  Health

2.  External

•  Material

•  Environmental

Social Values…

•  Family and Friends

•  Communities of Interest

•  Co-workers and Customers

•  Peer Groups, Neighbors

•  Associations, Organizations

•  State, Nation

Financial-Economic Values…

•  Sufficiency

•  Sustainability

•  Appropriateness

Discomfort Comfort

Personal Values

Social Values

Financial Values

*Source: Lois A. Vitt.

Physical Values

LifeValues Decision Making*

Points to Ponder Ø  You cannot “negotiate away” your unique

values. You must accommodate them.

Ø  You cannot “negotiate away” another person’s values either. Think about how they were formed and instead try to put yourself in their place.

Ø  You must find a decision solution that accommodates your values as well as those of a partner, family member, co-worker, client.

Ø  Too difficult? Stay tuned by downloading…

Overcoming Biased Decisions

Ø  Widen your thinking-decision horizon.

Ø  Find and try out contrary positions.

Ø  Understand your own emotions and cognitions.

Ø  Maintain realistic confidence levels.

Ø  Sleep on every important decision and also those with possible important consequences.

Exercise…

1.  Publications: Values-Centered Financial Education: Understanding Cultural Influences on Learners' Financial Behaviors

2.  On the ISFS Home Page Click on http://smartaboutmoney.org/Tools-Resources/LifeValues-Quiz.aspx •  LifeValues Quiz & Other Exercises

Resources at www.isfs.org

THANK YOU

Lois A. Vitt, Ph. D. lvitt@isfs.org