Almost 20 years ago, three academics named Halpern, Blackman and Salzman did a study on oral contraceptives. What they found was that if you used the drug, the odds of dying increased by 0.0083 percent. In other words, if 100,000 people didn’t take the drug 99,998 would still be around, whereas if 100,000 took the drug 99,992 would still be around.
They shared this information with potential customers and the consumers shrugged off the extra six bodies. They then stated the risk another way. They told the consumers there was a 4 times greater risk of death (8 people die instead of 2 for every 100,000 souls).
Again, the consumers shrugged off the extra risk. They tried a different angle and told the consumers the drug resulted in a 400 percent increase in deaths. The consumers freaked, and said the drug was too risky. Keep in mind nothing had changed except the way the information was presented.
Flash forward to 2005. A quartet of researchers at another university were studying investor reactions to stock gains and losses. One study group was told their stock price had dropped from $1 to 76 cents for a loss of 24 cents. Another study group was told the value of their stock had dropped 24 percent. The investors that were told their stock had dropped 24 percent were unhappier and more likely to sell their stock.
A similar story occurred on the gain side. Investors told they were up 24 percent were happier and more likely to sell their stock to cash in on the gain than those that were told their $1 stock was now worth $1.24. Here’s another result: Investors that were told their stock was up a quarter or down a quarter seemed less affected and were inclined to do nothing.
What all of the studies pointed to was that consumers were keying in and making their decisions based on the absolute magnitude of the change and not the real mathematical change. Since 24 percent is bigger than $.24, consumers were swayed by the larger number. Even though we rationally know that, say, 20 percent is one-fifth and a $.20 movement on $1, all mean the same change has occurred. Yet we process the information differently and pay more attention to the bigger number.
What does this mean for financial counselors? The implication is if you are offering a 5 percent annuity rate and a competitor is offering 6 percent, you should tell the prospect the competitor is only higher by 1 percent, but if you are in competition with a competitor paying 4 percent, you should be telling the consumer you can get them 25 percent more.
One needs to be aware that consumers are greatly affected by the largeness of the number and proceed accordingly. It means telling a client they’ve lost 20 percent will probably cause less of a reaction than telling them they are down $2,000, and saying they’re down by a fifth may cause no reaction at all. And telling a CD owner you can get them a 50 percent higher yield is better than saying you can get them 2 percent more interest.
The size of the talk affects the consumer’s perception.