Hear from Dr Louis Williams, Dynamic Planner’s Head of Psychology and Behavioural Insights, in candid ‘Conversation With’ Kim Dondo, of the Money Marketing Podcast. Louis talks about life before Dynamic Planner; how psychology impacts financial planning decisions, big and small, we all make; biases which creep into our decision-making process; and how weather and cash flow modelling forecasts share more common ground than you think.

[Money Marketing] What is your background Louis?

[Louis Williams] My background is in experimental psychology, different research using eye-tracking techniques, to see how people view information, for example, graphs. I began working on a joint, two-year project with the University of Reading, where I still have a visiting fellowship and Dynamic Planner, to see how we can create new tools and measurements, to understand more end clients and investors, and their behaviours. After the project ended, I joined Dynamic Planner permanently.

[Money Marketing] How does psychology play a role in shaping our financial decisions?

[Louis Williams] Many fields of psychology are relevant when it comes to shaping how clients make financial decisions, and not just important financial planning decisions, but decisions we make every day in the supermarket, for example.

One issue today is there are so many options out there when it comes to making a purchase, so much information, from so many sources – family, friends, your financial adviser, social media. We have limited time to make decisions and we are only human. We don’t have the capacity to always make the best choice, so sometimes we have to simplify the process.

For example, you’re in the supermarket and you only have a choice between two different products. In that instance you might look at all of the information available to you, like price, calories, ingredients. But if there are lots of products and you need to leave the store in two minutes, you might simply base your final decision on price, so your decision-making process changes.

Psychology, in that sense, is important for us to understand how that works, because those decisions and the shortcuts we take to sometimes make them leads to biases and ‘errors’. We make them because we’re trying to simplify the decision-making process.

[Money Marketing] What common biases today can financial planners be aware of in their clients?

[Louis Williams] Today, availability bias is important. By that we mean basing decisions on information which comes to mind quickly, or easily. Again, we can think of the example in the supermarket where you pick up a product and are instinctively shocked by its price. It’s more than you remember it being last week.

There is also recency bias, where we think what has happened recently will continue to happen in future. For example, if we make a decision on a 10, 20-year mortgage rate, based on what’s happening in the UK right now.

We can also think about anchoring bias. A client could be anchored or fixated on the value of their portfolio last year and how it is still making them feel, how optimistic they are or not, about the value of their portfolio this year.

[Money Marketing] How can behavioural insights lead to better outcomes for investors?

[Louis Williams] Before I joined Dynamic Planner, I helped run one eye-tracking study into meteorology, nothing to do with financial planning or investing. We showed people who took part graphs of weather forecasts. And what we found was that when we showed people a median line of what weather to plan for, people fixated on it, even when we asked them questions not relevant to that median line.

When we removed that line, showing them the same forecast, we found that people viewed the whole graph much more. We have applied that learning now to Dynamic Planner, in a cash flow planning forecast, which shows a median line of how they can most likely expect their portfolio to perform in future.

An adviser and their client can click on an option to reveal possible investment paths, which go into producing that median line, and enabling the client to really visualise the volatility inherent within their portfolio, and the ups and the downs when it comes to performance. It shares the story of while you may end up in a particular place, in future with your portfolio and its value, it may not necessarily be a smooth path or journey to get there. These types of techniques and experiments can be applied in financial services, even when initial studies and findings had nothing to do with the field. We can still learn.

Hear more from Louis Williams, Dynamic Planner’s Head of Psychology and Behavioural Insights in the Money Marketing Podcast.