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.