By Ben Steverman, Washington Post
It’s hard to find a place today where concepts of behavioral finance aren’t being applied to real-world situations. From London to Washington to Sydney, governments are experimenting with the psychology of decision-making and trying to “nudge” citizens toward better behaviors, whether that means saving more for retirement or signing an organ donation card. Meanwhile, businesses see opportunities for higher profits. To grab more attention and dollars from consumers, companies as far afield as banks and fitness-app makers carefully design their offerings with consumers’ decision-making quirks in mind.
Many behavioral interventions work, whether at reducing litter and power use or boosting savings rates. Yet these successes aren’t the whole story. Even after rigorous experimentation and data analysis, the best-intentioned nudges can fall flat or backfire. Some may be behavioral bandages that don’t address deeper structural problems such as stagnating wages. Nevertheless, consumers have jumped on the bandwagon, eager to be manipulated into the best version of themselves, and businesses are rushing to meet the demand.
Where many people need the biggest nudge, if not a shove, is with making financial decisions. The effect of emotion on investment decisions is usually negative — good old fear and greed, as well as paralysis from being overwhelmed by choice. At the same time, even if someone wants to build an emergency fund or open an IRA, bad spending and saving habits are hard to break. To help users follow through on good intentions, a raft of financial apps and online investing Web sites use a mix of encouragement, nagging, incentives and design.
The biggest problem that businesses — and governments — must solve is one that rarely comes up in a behavioral psych lab: how to get people’s attention in a world filled with more distractions by the day. An app or any tool designed to spur your self-improvement must battle the demands of work and family as well as the delights of the Internet and the 50 other apps on your phone. So when it comes to investing, “most people are asleep at the wheel,” says Mike Sha, co-founder and chief executive officer of SigFig, an online investment manager.
This is where Silicon Valley’s skills come in handy. Adam Nash, chief executive of online investment manager Wealthfront, which attracted more than $800 million in assets in two years, notes that many of his employees once helped design social software like Facebook. They know, he says, “how to design systems that trigger emotional responses.”
You know what Nash means if you’ve ever unintentionally wasted hours crushing virtual candies, scrolling through your Facebook timeline or catapulting angry birds. The digital world is built to be addictive — continually satisfying you in just the right way to keep you clicking, playing or posting.
By living on mobile devices and using some of these digital techniques, apps can grab your attention in real time. The app Check uses alerts, timed for when they would be most effective, to make sure users pay their bills on time. Investment sites including Betterment and Wealthfront make investing as automatic as possible, while reducing distractions that might get users trading too much — so no charts of the day’s stock market moves show up on their Web sites.
Article continues here: Manipulated: The Rise of Behavioral Finance