I Make Better Decisions In German

Do you speak a second language? I speak German and, according to research released in June 2011, that second language might  be just the tool I need to improve my financial decision making.

In their manuscript, The Foreign Language Effect: Thinking in a Foreign Toungue Reduces Decision Biases, Boaz Keysar, Sayuri L. Hayakawa and Sun Gyu An present a series of experiments designed to test the impact of using a foreign language on decision making. They hypothesized that using a foreign language might force decision makers to process information in a more analytic, system based process than doing so in a native language. Using a native language allows decision making to occur on a more intuitive level where many biases are employed to ease the decision making process.

The conclusions drawn in the paper are pretty straightforward: thinking in a foreign language reduces the use of behavioral biases and heuristics.

Foreign Language Highlights

The research offered some pretty profound insights into the impact of using a foreign language on decision making. Two heuristics discussed in behavioral financial literature (framing and loss aversion) were shown to be significantly reduced by the use of a foreign language:

• When a decision is framed in terms of potential gain, people have a bias to be risk averse. But when the same decision is framed in terms of potential loss, people have a bias toward risk seeking. When using a second language, this framing impact disappeared entirely. Framing risk no longer changed people's willingness to accept risk.

• Loss aversion was significantly reduced when making a decision in a foreign language. People presented with a bet that had higher potential gain than loss often have a bias to avoid the bet focusing more strongly on the loss despite the outsized potential gain. However, when making the decision in a foreign language, the likelihood of accepting the bet increased significantly.

The researchers offer a suggestion for why foreign language seems to turn off these powerful behavioral biases. The factor believed to be at play is that the use of a foreign language reduces the emotional reaction while making a decision. Emotions loom large in behavioral biases and limiting emotions would lead to less biased decisions.

I suspect there may be another mechanism at play. Because using a foreign language causes a decision maker to activate a more logical, systematic part of the brain to process information; the decision also ends up being processed in this part of the brain. Instead of relying on intuitive processes which are loaded with heuristics and biases, the decision is made using logical and systematic thinking.

Is All The Jargon Bad?

All this leads me to wonder what this means for helping people make good financial decisions. How can this foreign language mechanism be used? The obvious idea would be to communicate with clients in a second language. In practice, this would be tremendously difficult, however. It requires that the planner (or someone in their practice) and the client speak a common second language, assuming the client knows a second language in the first place!

But what about the jargon we so frequently use? The financial services industry is often admonished both from external and internal sources for relying so heavily on difficult to decipher jargon. Yet how different is understanding complex jargon from thinking in a second language? Wouldn't it be entirely fascinating if heavy use of jargon actually improved financial decision making by decreasing the impact of behavioral biases?

I'm not sure that the use of jargon would actually improve decision making. However, I do wonder what small steps could be taken to change the way we communicate that more closely resemble the processes of thinking in a foreign language.

Maybe I just need to start approach all of my financial decisions using German instead of English.

What are your thoughts?

A Woman's Touch Increases Risk-Taking

Imagine this: your momentary touch on another person's shoulder changes how likely that person is to accept financial risk. Just an instant tap and a person engages in more risky behavior. This would have huge implications for financial planners, salespeople and a variety of other professional.

Some very interesting research I recently ran across suggests exactly this kind of mechanism does exist. Physical Contact and Financial Risk taking by Johnathan Levav and Jennifer J. Argo (Columbia University, April 22, 2010) displays links between the momentary touch by a woman and a person's likelihood to subsequently make riskier financial decisions.

Deeply Touched

Through a variety of experiments, the researchers tested their hypothesis, which read:

…certain forms of physical contact will evoke a sense of security in experimental participants, and that this sense of security, in turn, will increase their willingness to make risky financial decisions.

The results are dramatic and pretty darn remarkable. In the experiments, the researchers found significant impact in the willingness of test subjects who were touched on the shoulder to accept greater financial risk than those who only experienced a handshake. One experiment showed a nearly 70% increase in the amount the touched subjects were willing to put at risk.

However, the person touching the test subject was an important factor in determining if this increased risk-taking actually occurred. The researchers determined that risk-taking decisions were increased only when a woman touched the subject’s shoulder, with no impact when a man was the person touching. Whether the test subject was male or female had no impact.

Remembering Mom

But why would this occur? The researchers theorized that the reason risk taking increased following a woman's touch was due to an increased sense of security. Basically, when momentarily patted on the shoulder by a woman, maternal memories are engaged which increase our sense of security. We recall mom’s safe and secure touch. This increased security then leads us to feeling more comfortable with financial risk, which results in taking more risk.

Levav and Argo tested this mechanism in the final experiment of their research. In this experiment, they found a strong tie to "sense of security" and risk-taking behavior. For three test groups that were rated as feeling secure, the willingness to take financial risk was higher than the groups rated as feeling insecure.

Dangerous Stuff

This research could have widespread and powerful implications for financial planners. I can picture the kind, friendly female financial planner greeting a client with a handshake and a friendly touch on the shoulder. This planner may have inadvertently primed the client to make more risky financial decisions during the meeting than they may have made otherwise.

Perhaps the client then agrees to a higher equity position in a portfolio than they might later be comfortable with, leading to anxiety and sleepless nights. Maybe the client ends up blaming the planner when the portfolio behaves in a more volatile manner than the client is expecting. This small touch could lead to misunderstanding, unhappiness and even risk of losing a client.

More cynically, I might suggest that professionals involved in selling higher risk financial products could intentionally use this touch mechanism to influence people's willingness to purchase. A client known to have feelings of insecurity and fear could be primed with a light touch at the beginning of a sales presentation or meeting, changing the dynamics for the rest of the meeting. This might not even be done with nefarious intent, but simply to urge a client to make a decision the professional believes to be appropriate.

Small Scale

It's important to note that this is only one study and rather small scale. Each experiment only included a few hundred test subjects. There is potential that the study was flawed or that the subjects simply weren't representative of how most people would react. However, as the study notes, the impact of touch and risk-taking behavior has been suggested in other studies, although not in the context of financial risk-taking. There does seem to be something to this.

It's important that financial planners understand this type of mechanism. What the planner may view as a friendly gesture, as a way of connecting with clients on a personal level, can actually change the client's behavior. This may not be a bad thing, but it needs to be understood by any professional working in a client's best interest.