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?