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Retirement Planning > Saving for Retirement

At NAPFA, Behavioral Economics—What Works and What Doesn’t

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“Ever had a conversation with a client about money and logic got up and left the room?” Ted Klontz, Ph.D, asked the audience at the annual National Association of Personal Financial Advisors conference in Salt Lake City Wednesday afternoon.

Klontz, an author and behavioral psychologist, delivered his presentation entitled “When Logic Leaves the Room, and What We Can Do About It” to the roughly 700 fee-only advisors in attendance. He began with attention-grabbing statistics, including:

  • When using cash as opposed to credit, people will typically spend 30% less.
  • One in five older workers said they contribute to a 401(k) or some other type of retirement plan when in fact they do not.

“The question is why,” he said. “The answer is that close to 99% of what we do is controlled by our unconscious mind. For instance, if you use words with clients that they don’t understand, research shows that their brain will spend up to 20 seconds searching for the meaning of the word. This is 20 seconds in which they are not present in the conversation. Now think about what happens if you use a word they don’t understand every 15 to 20 seconds.They will do everything they can to appear like they are competent and understand you.”

Klontz went on to describe three main levels of the human brain, how each processes information and how it impacts communication with clients. The first level he called the “Einstein” level. This level is rational, creative and understands the notion of the abstract. The second level is “Reptilian,” meaning it is animalistic and only understands the concept of “friend or foe.” The third level is “Mammalian,” meaning it will process information in an immature manner relative to a five- to seven-year-old chimpanzee.

“Now think about this,” Klontz said. “The first level processes 2 million bits of information per second. The next two levels (or the bottom two-thirds of the brain) each process 4 billion bits of information per second. If there is any surprise when conflict occurs which part of the brain will respond the quickest?”

He explained that a type of trapdoor is present in the brain that closes in moments of confusion and conflict. As the brain begins to search for an answer, the bottom two-thirds (or the irrational section) reacts quickest. The bottom two-thirds are primal, he noted, in that

our greatest fear as modern human beings is being isolated and exiled, or as he said “thrown out of the tribe.” The brain will do everything it can to prevent this from happening.

This lead to an explanation of motivational reasoning, which has the following characteristics:

  • We expect people to be convinced by the facts, which flies in the face of—the facts.
  • Any amount reason is overwhelmingly suffused with emotion.
  • The bottom two-thirds of the brain understands only three things: run, fight and freeze.

“Our challenge is to do what we can to keep that trap door open, and to learn to speak the language of the unconscious mind,” he said.

He then offered what he called “guaranteed trapdoor closers,” which include:

  • Using language that only you understand.
  • Acting in a crisis mentality. In a crisis, the part of the brain that is extremely selfish will take over. It is extremely selfish even within its own body. This means if the body needs energy even to keep breathing, the brain will redirect it to the selfish part of the brain in order to keep it alive. It cannot intuitively understand that by redirecting the energy for breath, it too will eventually die. The crisis mode occurs when the door is almost closed (the run, fight, freeze stage). This almost always results in emotional and destructive behavior.
  • Giving more information than you need to give, which overwhelms clients and closes their trapdoor.

“Ultimately, you should work with your clients in a way that guarantees you’ll never have to ask them another question,” Klontz explained. “Questions can too easily be interpreted as statements, which can be judgmental. If clients sense that, they begin to fear not having an answer and they will close the trapdoor by giving the easiest and quickest answer available to extricate them from the situation.”

What can be done from the standpoint of achieving more effective communication?

Step 1: Keep the door open by not speaking from the Einstein portion of the brain to a client speaking from the lower two-thirds portion of the brain.

Step 2: Learn to speak that language of the unconscious. The bottom loves visual stimulation, so for instance, use age 68 rather than a vague notion of “retirement age.”

“A study using age progression technology found when used with a client, it resulted in a 200% increase in savings,” he said. “The Einstein portion of the brain thinks it’s stupid, the lower two-thirds of the brain thinks it’s okay. Ever cry at a sappy movie and think ‘Why am I crying at this stupid movie?’ The Einstein portion thinks it’s stupid, but the lower portion thinks ‘it’s okay; I need this.’”


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