Limiting Choices and Details in a Full Disclosure World

As financial planners, we live in a world where we are required to give our clients full disclosure on conflicts of interest and to make certain we do not omit vital information and details when providing advice. But what if those requirements actually lead our clients to potentially make worse decisions? What if more information leads to poorer financial decisions?

An interesting article by Ron Friedman, Ph.D. on Psychology Today makes precisely this assertion. Friedman writes:

Imagine that you are a loan officer at a bank reviewing the mortgage application of a recent college graduate with a stable, well-paying job and a solid credit history. The applicant seems qualified, but during the routine credit check you discover that for the last three months the applicant has not paid a $5,000 debt to his charge card account.

Do you approve or reject the mortgage application?

Group 2 saw the same paragraph with one crucial difference. Instead of learning the exact amount of the student's debt, they were told there were conflicting reports and that the size of the debt was unclear. It was either $5,000 or $25,000. Participants could decide to approve or reject the applicant immediately, or they could delay their decision until more information was available, clarifying how much the student really owed. Not surprisingly, most Group 2 participants chose to wait until they knew the size of the debt.

Here's where the study gets clever. The experimenters then revealed that the student's debt was only $5,000. In other words, both groups ended up with the same exact information. Group 2 just had to go out of its way and seek it out.

The result? 71% of Group 1 participants rejected the applicant. But among Group 2 participants who asked for additional information? Only 21% rejected the applicant.

More information changed the decision made by study participants. The information didn't change the fact set, yet dramatically altered the analysis of the decision...likely for the worse. But what does this mean in the context of financial planning? Can financial planners select what information to provide to clients and what information to allow to be ignored? Can choices given to clients be limited in order to reduce information overload that might cause clients to make a poor decision?

I suspect that in practice financial planners do this all the time. Certain information is deemed as inconsequential or distracting by the financial planner, likely without them even consciously deciding so. Certain options are clearly so detrimental or unsuitable that the financial planner never even considers it for the client.

But I wonder if it would be a mistake for a financial planner to deliberate withhold information from clients based on a belief that some information might lead to a poor decision. Legal issues aside, is a financial planner equipped to determine what information is valuable and helpful and which information is harmful? Worse yet, by withholding information, are a planner's personal biases and money scripts impacting the decision about what information to share and withhold?

Instead of acting as the gatekeepers of information, I suggest planners help clients understand that more information isn't always better.  Planners can help clients understand the impact too much information can have on decision-making. Planners can help clients recognize when the client is digging exceptionally deeply for information, and help the client reflect on whether that information will actually help the decision or may, in fact, harm it.

It seems clear that too much information is detrimental to good financial decision-making. And, at some level, financial planners must limit the amount of information they give clients, if for no other reason than a lack of time and patience (both on the part of the planner and client) to work through every piece of tangentially relevant information. But how do planners know what to share and what to hold back? What is critical for a good decision and what is harmful? How does a financial planner know when to caution a client that more information may be detrimental?

I suspect that answer lies somewhere in the 10,000 hours of practice identified in Malcolm Gladwell’s Outliers as required to master a skill. There may be no specific process or procedure to determine this, only learning through experience and observing a mentor and practice.

A Super Simple Secret To Improved Decisions

Is it really possible that a pen and paper may be the ultimate tool to improve decision-making? When I began this blog, I thought it would take work to stumble upon ways to understand and improve decision-making. Yet, in only my third post (Bad Outcomes, Revisited), I bumped into the idea of a decision journal.

The idea is simple enough. When making major or notable decisions, write down the thought process leading up to how the final decision was made.  Really it's no different than any other type of journal a person might keep, but in this one you document your daily decisions. 

While it seems simple, the impact could be profound. The decision journal becomes a record of how we went about making a decision. The journal can be used to remind us in the future of what processes appeared to work out well and which rationale ended up in a poor outcome. The journal offers us reminders of how we have made decisions in the past.

And this could be very important in improving decision-making. Without some record of our decisions, we still look to past decisions to help make future ones. We scour our memories for similar decisions and rely on those experiences to guide us. The problem as, we're sort of bad at remembering the past clearly. Hindsight bias changes the way we view the past decision in the present. Confirmation bias helps us remember the decisions that support our current position while overlooking decisions that might offer an argument against that position.

A decision journal offers a layer of protection against the effects of these. I doubt that the protection is perfect or absolute, but I suspect it is very helpful.

I'm going to beginning digging into the decision journal more and look for research on the impact of decision-making record keeping on future decisions. In the mean time, I intend on maintaining a decision journal for myself. How about you?

Bad Outcomes, Revisited

In my last post Good Decisions, Not Good Outcomes I made the argument that a good decision doesn't necessarily result in a good outcome. Further, I argued that a bad outcome does not mean a decision was bad. I'm not sure how effective my argument was, but fortunately I can today share a much better take on the same argument.

Thanks go to  Susan Weiner (@susanweiner) for tweeting to me the article linked below from the Farnam Street blog. The blog post speaks to the issue of decisions versus outcome in a very effective way. I found the Decision/Outcome matrix to be particularly compelling.

What Happens When Decisions Go Wrong

If we can agree that the quality of decision and quality of outcome are not directly tied to one another, we have a new issue to deal with. Why bother with trying to make good decisions at all if the outcome is still a result of chance?

As stated in my previous post, I believe that good decisions and a good decision-making process should result in a higher frequency of good outcomes on the aggregate. Any individual decision may still turn out poorly, but the likelihood of bad outcome is lower than for decisions made with a bad decision-making process.

Good decisions and good decision-making remains important even though chance plays a large role in final outcome.

The linked article explores another topic I want to dive into more, the Decision Journal. I've long been interested in the benefits of journaling and often speculated that a client/planner journal could be beneficial in the financial planning relationship. A decision journal sounds particularly compelling. I will be exploring that more in the near future.

For now, I'm glad to have had a well laid out agreement with my position shared with me. I think breaking the decision/outcome link is an important starting point for this blog.