Presenting Plan Performance as a Story, Not as Statistics!


The performance of a retirement income plan is almost always presented to the client using statistics of the probability of success. What your clients understand from those statistics, and what actions they take, may be different from what you expect them to understand and do. Behavioral finance research can help you reconcile the gap between your expectation and the actual behavior of the client.

To help you understand the gap, you must be familiar with a few terms from the best compendium on behavioral finance research, Thinking, Fast and Slow, a book by Nobel Laureate Daniel Kahneman. All your mental activities can be executed by two different systems of the brain: System 1 operates automatically, relies on associative memory, seeks coherence, and is responsible for your reactions to a picture of an angry man; and System 2 is slow and deliberate, and is responsible for doing activities like arithmetic computations.

The second, relevant key aspect is “What You See Is All There Is” (WYSIATI). It is best explained through an example. If you are asked "Will John be a good leader? He is intelligent and strong ...", your answer will be yes. You use the limited information available to form a causal argument and story in your brain, and arrive at a conclusion. You don't go through a comprehensive analysis of all the attributes of a good leader. What if the next two adjectives in the description were corrupt and cruel? Your answer will still be on the positive side, but less than if you were seeing only the first two positive adjectives. The answer is still positive, as System 1 constructs an initial positive impression from the first two words that is then modified with additional negative information—that is why first impressions are last impressions. If the same description was presented as corrupt, cruel, intelligent and strong, you would answer no because of the negative impression.

When you portray the performance of an income plan as probability of success, think of the associative memory that you trigger for the client with these words, specifically the word probability.

You may trigger the memory of a dart board, roulette wheel, playing cards or dice. In these contexts, the probability of success of 70% sounds good, 85% terrific. Is that an acceptable probability of success for a retirement income plan? Do you think when a plan with 85% probability of success is presented, the client also interprets that it has 15% probability of failure? No, the client doesn't and WYSIATI explains such behavior. The client's System 1 interprets what is presented along with all the associative memory that it invokes.

So, you may think that presenting the results as 15% probability of failure is better. But again, as long as the term probability is used, it will invoke a memory of objects like a dart board. It will not get the client to think about the fact that there is a 15% chance that he will not have enough money to live and he will have to be a financial burden on his kids.

A better way to get the client to appreciate the risk is to tell him that 150 retirees out of a thousand retirees with a similar plan would not have produced the full income over the planning horizon. When presenting the same statistics as individual cases like 150 individuals, you get the retiree to think of a big room full of a thousand retirees, out of which he puts 150 of them into a corner representing those who didn't get full income in their plan. Your client now sees that he could land in that corner. Now, he starts appreciating the risk of not generating the full income and because of the associative causal process of System 1, starts thinking about the consequences of being in such a situation.

The second part of the risk presentation is to give the client an understanding of the negative impacts of the partial income situation. This is done in Income Discovery by presenting the situation of an Unfortunate Retiree (read article on mathematical definition of Unfortunate Retiree) as the number of years of full income and the total cumulative shortfall for the Unfortunate Retiree. If the client had 85% of the desired income locked in from Social Security and inflation-adjusting income annuity, his situation post-exhaustion of the portfolio will not be as bad as another client who had only 35% of the desired income after portfolio exhaustion.

The objective of such a presentation is not to scare your clients, but to offer an honest assessment of their plan so they can adjust it, or possibly build protection that will give them peace-of-mind on the financial front, and thus time to enjoy their retirement.


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