Mention the word “behavioural” and everyone in industry pays attention. While much of the focus is on investment decisions, behavioural influences can have an even greater effect on consumer decisions around their retirement, especially as retirement brings extra dimensions of complexity. Here we set out the family of behavioural influences and suggest considerations for super funds.
Behavioural influences may be arranged into three categories
Behavioural influences (or effects) broadly fit into three categories. Each has differing implications for the capacity of individuals to make decisions in their own best financial interests, and what actions might be taken to assist them to do so.
A) Bounded rationality – This category captures why individuals may not have the capacity to make good financial decisions. Essentially it boils down to a lack of the required skills or knowledge. Aspects such as low financial literacy, poor longevity awareness, limited knowledge of relevant policies and products, and cognitive decline all sit under this heading.
B) Poor self-control – This category includes behavioural influences that lead to limited self-control or willpower. Two classic effects include a tendency towards inaction (i.e. putting off decisions) when action is needed and focusing too heavily on the short term.
C) Decision biases – This category covers a wide range of behavioural biases they may lead to poor decisions. This large group includes effects such as narrow framing, anchoring and much more.
The table below lists the behavioural influences that impact retirement decision making, grouped into the three categories.
Behavioural influences
| A) Bounded rationality | C) Decision biases |
| • Low financial literacy and numeracy
• Poor longevity awareness • Lack of knowledge • Decision states • Cognitive decline |
• Acquiescing to defaults and recommendations
• Anchors, reference points and loss aversion • Framing • Mental accounts • Exponential growth bias • Wealth or money illusion • Rules of thumb • Implied endorsement • Trust |
| B) Poor self-control | |
| • Inaction – procrastination, status quo bias
• Short-termism – myopia, present bias |
What should super funds be thinking about when helping their members around retirement?
Below we set out seven reflections for super funds, drawing on The Conexus Institute’s most recent ‘retirement explainer’ (see end of this article for details and links).
- Complexity as a compounding element
Complexity compounds the difficulty of making informed decisions and exacerbates vulnerability to behavioural influences. This particularly applies to retirement where decisions are both ‘new’ and entail complicated strategies, products and rules. Given the combination of difficult decisions and poor understanding, it is unsurprising that members may procrastinate or make impulsive decisions, resort to simple rules of thumb, respond to what is most visible, or take what is offered on trust. The consequence is that they become vulnerable to making poor choices.
- Dealing with bounded rationality entails overcoming poor understanding
Bounded rationality essentially arises from poor understanding. Education can help, but only takes members so far when the topic matter is complex or technical. An alternative is to introduce various forms of ‘hand holding’. In addition to financial advice, members can be assisted through providing ‘just in time’ information when in a decision-making mode, or taking them on a ‘journey’ through various decision states until they are better prepared to make an informed choice.
- Behavioural influences as both problems and tools
Many behavioural influences – particularly decision biases – may be viewed as both a source of poor decisions and tools for encouraging better decisions. A key theme in this regard is the importance of how options are presented to members. Care is needed to ensure that a presentation is not inadvertently encouraging inappropriate choices. Rather, the aim should be to guide members towards better decisions through taking actions that recognise and perhaps exploit the existence of biases for good.
Surreptitious use of framing and embedding of reference points are two notable techniques. For instance, short-termism might be countered through framing around income over time rather than balances and returns. Breaking a retirement solution down into buckets that support forming income layers makes use of propensity for narrow framing and mental accounting. Members might be encouraged to draw down at a higher rate by placing suitable drawdown rates in a prominent position to establish them as the reference point instead of the minimum drawdown rules.
- What is offered can set the agenda
Another theme is that what is offered to members can be influential. Recommendations are often followed as they can be received as an implied endorsement from an expert, and even if not taken up, can establish an anchor that acts as a point of departure. Defaults in particular are powerful because people tend to accept default offerings. However, defaults can be either beneficial or detrimental depending on whether they are suitable to the circumstances of a particular member or cohort of members. They thus need to be crafted carefully.
The value of nudges is a related theme. Indeed, defaults, recommendations and suggestions might all be viewed as forms of nudges of varying strength. Another variation is ‘activity nudges’ that prompt members to do something, which can act as a tool to help overcome inactivity.
Nudges of all forms should be offered with an opt-out to help guard against situations where they are unsuitable. Done this way, a nudge can start members off on their retirement journey from a reasonable departure point while allowing them to choose another course if they wish.
- Communications are the interface with the member, so take care
We recommend taking great care with member communications. Communications should be clear and understandable, and formulated on the assumption of low financial literacy and numeracy. Communications are the vehicle through which many of the actions we describe are delivered, including education, ‘just-in-time’ information, member ‘journeys’ through decision states, framing, nudges, and more. They should be crafted purposefully.
- Don’t just assume an action will work. Seek evidence
We view it as important to seek out evidence that actions taken to address behavioural influences will work as intended. Ideally this should take the form of member testing. Other methods include analysing past behaviour (if possible) and referring to existing research, provided they are relevant to the circumstances. One never knows how people react to an action until it is tested in practice.
- Embrace the behavioural
Most super funds and other providers seem well-aware of the importance of behavioural influences in how members engage with retirement decisions. Our message is that the presence of behavioural influences should not only be recognised but also embraced with two broad aims. The first is to prevent members from making poor decisions. The second is to use behavioural influences and techniques to encourage better decision making.
This article is based on the 11th edition of The Conexus Institute’s Retirement Explainer series, which covers a variety of aspects around delivering retirement income strategies. The Conexus Institute is available to deliver these explainers as interactive sessions to super funds and government entities on a pro bono basis.
Dr Hazel Bateman is a Professor in the School of Risk & Actuarial Studies at UNSW Sydney, a director of UniSuper and a member of the advisory board at The Conexus Institute. Dr David Bell is executive director at The Conexus Institute and Dr Geoff Warren is research fellow at The Conexus Institute and Honorary Associate Professor at the Australian National University. The Conexus Institute is a not-for-profit think-tank philanthropically funded by Conexus Financial, publisher of Retirement Magazine.
