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?

Emotionally Neutral Language - An Open Letter

To all who speak and write about financial matters,

In my years of helping clients make financial decisions, I've often had to work with clients dealing with strong emotions. Often these emotions came from internal sources, money scripts and beliefs that create fear or euphoria or some other emotion. Almost as often, these emotions are driven by something the client read in a newspaper, magazine, or website or heard on the radio or TV.

These media reports often rely on emotionally charged language to convey ideas and opinions. 2012 has been a banner year for emotionally charged language in media reporting, much of it driven by the Presidential election. Now it continues as we discuss the sequestriation set to occur at the end of the year.

FISCAL CLIFF! It's a big, bombastic phrase. It creates an easily identifiable visual cue to describe the sequestration process. Most harmfully, it creates tremendous emotion. Fear, anger, outrage, anxiety are few of the emotions that come up frequently. And these powerful emotions have a way of harming good financial decision-making. Emotions can short-circuit our ability to think long-term, instead compelling us to make decisions based on that big, ugly boogeyman (real or imagined) right in front of us. Financial decisions based on short-term thinking have this odd habit of not being very good.

GOLDILOCKS ECONOMY! Remember that one? The financial media loved it circa 2005 to describe the wonderful way the U.S. economy was going to gently slow down and settle in to a never-ending cycle of full employment and moderate growth. Again, an emotionally charged phrase, but this time designed to elicit positive emotions. I suspect more than a few poor financial decision were made while impacted by those positive, flowery emotions.

I could toss examples out all day, but the story doesn't change. Real people make real financial decisions with your words in their minds. They draw emotions from the way you write about financial matters. Your sensationalism can lead to their poor financial decisions.

I implore you to consider the impact you have and to think about presenting these critical issues in emotionally neutral language. Your readers and viewers have enough personal financial beliefs to draw their own emotions from. They need your help to understand the facts, to understand what lies ahead and to get good information.

Financial decision-making is hard enough when dealing with our own biases and behavioral foibles. Being bombarded with emotionally charged language only magnifies this difficulty.

Help people make good financial decisions. Help us (financial planners) help people make good financial decisions. Take the challenge to fulfill your vital role in a functioning democracy in a manner that helps, not harms, people's ability to decide well.

With deep appreciation,

-Nathan-