Goals-based investing can be a powerful tool to help investors clarify and meet their long term goals. Unfortunately, it’s surprisingly difficult for investors to tell you about those goals. And without accurate goals, goals-based investing is a great way to reach the wrong target.

Let’s look at the research into why eliciting goals is so difficult, and what you can do about it.

I’d like to ask you a simple question, one that advisors often ask their clients: What are your investing goals?

Please take out a notepad, or open up a text editor on your computer and write down your own goals for investing. Yes, I mean you, reading this blog post. Please take a moment and write them out — having them in your head isn’t enough. Like this:

  • Investment Goal:___________________________________________________
  • Investment Goal:___________________________________________________
  • Investment Goal:___________________________________________________
  • Investment Goal:___________________________________________________
  • Investment Goal:___________________________________________________

Got them?

Ok. Think hard about those goals – do they represent what you really value? You can change them as needed.

This exercise comes from the researchers Bond, Carlson and Keeney (2008). I discovered it thanks to Shlomo Benartzi’s wonderful book, Thinking Smarter, on how to set and follow retirement goals. (In case you’re wondering, yes, I’m trying to distract you right now.)

Next, look at the list of common goals in the “related” window on this page. Think about each one. Are these things that you value? How would you feel if you didn’t achieve one of these? At the bottom of the list above, write down any goals you initially thought of and that aren’t covered, so you now have a comprehensive list of goals.

Now, on the comprehensive set of goals (the common ones plus your additions), mark all of them that are important to you.

And finally, prioritize the goals you’ve marked, like this:

First Priority:      ____________________________________________________

Second Priority:  ___________________________________________________

Third Priority:     ___________________________________________________

Forth Priority:    ____________________________________________________

Fifth Priority:      ____________________________________________________

For many people, this final list of high priority goals is quite different than their initial one. In fact, people often omit important goals when asked about them, and this occurs in many domains.

In the study by Bond, Carlson and Keeney (2008), the researchers found that when they asked MBA students to list their goals for business school, 79% of people omitted a top-5 item, and 35% omitted their highest priority goal in the first step of the exercise. That’s right – over a third of the people didn’t mention their own highest priority goal when asked about it. So Why Does This Happen?

Researchers believe this phenomenon occurs for an almost inconceivable reason, which is especially difficult to imagine for those of us who work in financial services: many people simply don’t recall their highest priority goals when you ask them. Or, more accurately, they are thinking about other things at the moment, and those other ideas come readily to mind and hide their “true” response.

For example: someone who cares deeply about leaving a legacy of charitable works may have recently read an article about vacation trips in Italy. When you ask them about long term goals, they respond: “I’d like to take exciting vacations,” instead of “I want to establish a library.” Both are true goals, but “vacations” comes to mind easily, and the person stops without thinking more broadly.

It’s not that the person is insincere or that their other goals aren’t deeply held or “real” – it’s just that they aren’t thinking right now about that other facet of their life. Our capacity to think broadly at any given moment is severely limited because of how our minds are wired.

What You as an Advisor Can Do About It

The research literature offers both good and bad news about this problem. First, the challenge (an incomplete list of goals) is solvable with what’s known as a “master list.” Provide people with a comprehensive list of goals to think about; prompting them with a few examples doesn’t work and can even backfire (see Nickerson 1984 and Bond, Carlson and Keeney 2010).

Ask them to prioritize their goals after they’ve seen the master list (and not beforehand, because they might hold onto initial ideas just to seem consistent). Goal-based investing is a great approach to help investors. By using a master list, you can help ensure that your clients are working on the right goals and don’t regret their choices later.

The bad news, unfortunately, is that incomplete goal recall isn’t the only quirk of the mind that can derail a client’s goal setting process and their investment decisions more generally.

Investors struggle with a range of challenges, from well-known overconfidence biases, to lesser known intention-action and empathy gaps. Over the coming months, we’ll explore a variety of these quirks of the mind, and practical techniques you can use to help your clients better meet their financial goals.

Before signing off for this month, here’s a quick recap:

  1. Asking clients to “think hard” about their investment goals simply isn’t enough.
  2. Help clients by providing a comprehensive, neutrally worded list of options: a master list.
  3. Ask them to prioritize their goals after they’ve seen the master list.
  4. Check back here each month for more!

See Dr. Wendel’s February 2016 Investment Advisor article: Why Clients Don’t Take Your Advice

Research Referenced in This Article: 

Benartzi, Shlomo. Thinking Smarter: Seven Steps to Your Fulfilling Retirement…and Life. New York: Portfolio, 2015.

Bond, Samuel D., Kurt A. Carlson, and Ralph L. Keeney. “Generating Objectives: Can Decision Makers Articulate What They Want?” Management Science 54, no. 1 (2008): 56–70.

———. “Improving the Generation of Decision Objectives.” Decision Analysis 7, no. 3 (2010): 238–55.

Nickerson, Raymond S. “Retrieval Inhibition from Part-Set Cuing: A Persisting Enigma in Memory Research.” Memory & Cognition 12, no. 6 (November 1984): 531–52. doi:10.3758/BF03213342.