Three barriers to good investment decisions

by NZ Adviser27 Apr 2016
Feelings and fears are the key things that stop consumers making good decisions when it comes to their finances or investments. 

A cross-government paper released by the Financial Markets Authority (FMA) today delves further into why we behave this way.

The paper titled Using behavioural insights to improve financial capability looks into what influences financial decisions and whether they are conscious or not and was the result of a partnership between the FMA, the Ministry of Business, Innovation and Employment (MBIE), Treasury, the Inland Revenue Department and the Commission for Financial Capability (CFFC).

As detailed in the paper, the key barriers to good investment and financial decisions are our:

1.    preferences – our emotions and psychological experiences;
2.    beliefs – what we believe is likely, and what we believe about our own abilities; and
3.    decision-making rules – the flawed short-cuts we use to assess information. 

The paper also revealed four interventions that can assist with making good decisions, namely the EAST framework:
•    make the decision easy – for example, with defaults
•    make it attractive – do something to grab the attention 
•    make it social – encourage commitment, ideally to friends and family
•    make it timely – prompt a decision when people are likely to be most receptive. 

FMA director of external communications and investor capability, Paul Gregory says, “The best time to help New Zealanders focus on making good financial decisions is when they’re actually making them. 

“That means the investment and broader financial industry has an essential role. So, as well as the work government agencies are doing, we look to industry to use these insights positively: in their product design and marketing, disclosure, and in their sales processes.
“This is in all of our interests. We can’t have fair, efficient and transparent New Zealand financial markets if decisions are being made on the basis of bias or other emotions.”

As well as writing a paper, the FMA, MBIE and CFFC have partnered with Kiwi Wealth on a behavioural insights trial to commence later this year.  The trial will assess different approaches to encouraging default KiwiSaver members to make an active fund choice. Results will be shared with industry once the trial is complete.

The full white paper, Using behavioural insights to improve financial capability, is available here

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