Questionnaires Are the Root of All Evil in Financial Services, Professor Says

Financial decision-making is a challenging, complex puzzle of balancing goals, limitations and trade-offs. Advisors seek to achieve this ideal state based largely on client surveys and questionnaires. Alas, “surveys and questionnaires are the source of all evil and bad in the financial services industry,” argues Shachar Kariv, an economics professor at the University of California, Berkeley, and a leading decision theorist, in an interview with ThinkAdvisor.

These written question-and-answer quests for insight are unscientific, and not only do they fail to reveal how clients make investment decisions, they’re costly as well — “a killer combination,” contends Kariv, recent chair of Berkeley’s economics department.

The way to scientifically discern investors’ attitudes about risk and other money issues, Kariv says, is to use a totally different method, one that models clients’ choices and simulates the investing experience. Bring on: gamification.

Indeed, Kariv touts an electronic gamified approach, using graphical shapes, that he developed based on mathematics, game theory and behavioral economics principles.

By making investors face risk and loss, TrueProfile strives to “capture the essence of investing,” says Kariv, chief scientist and co-founder of TrueProfile, a subsidiary of Capital Preferences.

In a series of games, investors are asked to make tradeoffs and choose among various portfolios. The games — which clients can “play” in the presence of their advisor or on their own — were tested globally for more than a decade with several thousand people before their 2017 rollout.

ThinkAdvisor recently interviewed Kariv, on the phone from Berkeley. He joined the university in 2003, the same year he received New York University’s Outstanding Dissertation Award in the Social Sciences. His paper showed that rational behavior can lead to herd behavior — a mentality that often generates stock market booms and busts.

Here are highlights of our interview:

THINKADVISOR: To learn more about clients, advisors typically ask them to fill out surveys and questionnaires.  How helpful are these? 

SHACHAR KARIV: Surveys and questionnaires are the source of all evil and bad in the financial services industry. Surveys are the Achilles heel of the industry. They don’t do the trick, and they’re very costly. It’s a killer combination. They put the entire industry on very shaky ground.

Why is that?

Asking someone, “How risk-averse are you?” is like asking, “How many white blood cells do you think you have?” Surveys and questionnaires are the tools we use for understanding the client, but they have no scientific basis whatsoever. Until we fix this, very little can be done.

But isn’t there anything useful in questioning clients this way?

Maybe I’m not the financial advisor’s average client; but every time I go to one and he gives me a survey to answer, it makes him look stupid. He asks stupid questions. If you’re asking silly questions, all you can give are silly answers. It’s “garbage in, garbage out.” I think the advisor just files the questionnaire. He doesn’t really look at it.

To know oneself as an investor, do you need the help of a financial advisor?

Absolutely. If someone thinks we can provide good financial well-being by eliminating financial advisors and make them go to robos [advisors], that’s not the way. Financial decision-making is becoming more complicated. Providing financial well-being is as important as providing physical well-being — medical care. I’m holding advisors to the same level that I’m holding physicians.

What goes into knowing yourself as an investor?

It’s knowing your goals, constraints and preferences. Financial decision-making is a very complicated puzzle consisting of balancing those three pieces.

Please elaborate.

Goals can be “I want to retire” or “I want to renovate my kitchen.” Constraints can be how much money you earn, current health and future health [issues] that you can’t anticipate. Preferences are [tradeoffs investors need to make]: risk vs. return; whether you want something today or are willing to wait till tomorrow; and whether you want to leave money to [for example] your kids. To figure out those three pieces of the triangle, we need a professional to help us. Are financial advisors equipped to do that? I don’t think so.

Please talk more about tradeoffs.

All financial decisions are governed by those three tradeoffs: risk vs. return, today vs. tomorrow, you vs. others — that is, my well-being vs. the well-being of others.

How important are tradeoffs in making financial decisions?

Very important and very complicated. For example, when someone buys an annuity, they’re removing risk because they get a guarantee and a stream of payout in the future. However, you need to pay for the annuity now. So that’s a tradeoff between today and tomorrow. There’s a risk vs. return tradeoff as well: When you buy an annuity, you eliminate longevity risk, but to know your longevity risk is impossible.

The positives about annuities are attractive, but an annuity may not be right for every client, right?

Annuities can be good products. But it’s exactly like saying a hip replacement operation is a good product. I’m sure it is — for some people. What if you go into the hospital and they give you a menu: hip replacement, bypass operation [etc.] and ask: “What do you want?”

“I don’t know,” you say.