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Financial Planning > Behavioral Finance

Visual Tools Help Clients Make Complex Decisions

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Visual analytics, the science of analytical reasoning that is the result of interactive visual interfaces, has been used in numerous areas, including medicine and the physical sciences.

It is a relatively new area, though, for the social sciences as a whole. Yet visual tools are very important to the field of behavioral finance, and they can help a great deal in financial decision-making for individual investors.

Technology has made it much easier to present complicated information in a visual manner, said Anya Savikhin Samek, assistant professor of behavioral economics at the University of Wisconsin-Madison. However, technology can also be a double-edged sword because “we don’t yet know the best way to present data in a visual format, even if we know that people look at visuals more than they do written narratives,” she said. “It’s very easy to bias people one way or another, so the question on how best to visualize data is a very important and difficult one.”

When it comes to financial decision-making, though, visual data can make a clear difference, particularly when it comes to increasing peoples’ self-confidence, because the brain is more likely to process information that is easier to understand, Samek said.

In a recent study, Samek presented information on the importance of risk diversification — an issue many financial advisors find tough to get across to their clients — in three different ways to 829 respondents to a RAND Behavioral Finance Forum American Life panel, representative of Americans across the United States. The same information was presented in a classic narrative form; via FinVis, an interactive visual tool that Samek developed and has tested in lab conditions; and finally, as a series of enacted video skits.

“Out of all of them, the written narrative did the worst,” Samek said, “whereas the videos and the interactive tool are far more engaging. It’s clear that people tend to ignore and just not read the same information when it’s written out in a narrative.”

That means that if they’re only presented information as a written narrative, people will be less likely to make important financial planning decisions.

FinVis, the visual analytics tool Samek has helped develop, can help financial advisors a great deal. It allows users to interpret the return, risk and correlation aspects of financial data with the goal of making personal finance decisions. The tool is both exploratory and interactive, Samek said, and helps users quickly choose between various financial portfolio options and view possible outcomes. Users can analyze the outcomes of short-term or long-term investment decisions on a hypothetical portfolio. The tool also helps users overcome cognitive limitations and understand the impact of correlation between financial instruments in order to reap the benefits of portfolio diversification.

One of the tool’s most important outcomes is what Samek calls the “mastery experience,” which is based on the idea that by creating a hypothetical portfolio they can manage, users will be able to master the usage of the tool and therefore become more confident about their abilities to replicate their experiences in a real-world investment portfolio.  

The visual also increases financial literacy and knowledge to a far greater extent than the written narrative, Samek says, and financial advisors who can package information in a visual and interactive manner are likely to see a far more positive outcome when it comes to their clients making financial decisions.

However, ther’s a catch.

Although her experiments have shown that through mastering a visually interactive tool people become more confident about their financial and investing abilities, Samek warns that there’s a danger of more people becoming overconfident in their market interactions as a result of their virtual mastery.

Finding the right balance with visual tools — one that educates people about complicated financial concepts, increases their knowledge base and makes them feel more capable of making important financial decisions but without pushing them to be rash — is important, she says. It’s an area that behavioral finance specialists must continue to do more work in.


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