Think back to the last time you had to make a hard, important decision. Were you picking an asset allocation for your 401k, selecting a health insurance plan or deciding whether it was time to refinance your mortgage? What kind of help did you seek and what kind of help was available? Were you confident in your decision? Did you feel that the help you received made you smarter or kept you dependent?
Policy makers, employers and not-for-profits all have an interest in how well their constituents, employees and customers make decisions. When they select an intervention, they obviously need to consider the benefits and drawbacks of the alternatives. The strategies they may choose from generally fall into three categories:
- Deep education
- Decision tools/Curation
Deep education is the traditional intervention that entails giving people a lot of information and know-how with the expectation that this will allow people to 1) choose from many, often subtly different options and 2) make a decision that is optimal for them.
A good example is FoolProofme.com. It offers detailed financial literacy education for individuals and schools as well as guides to car buying and leasing, student loans, privacy and “wedding on a budget.” Another is the Consumer Financial Protection Bureau (CFPB). It has a many, many pages on buying a home. And, if you’re interested in investing in municipal bonds, the Municipal Securities Rule Making Board (MSRB) has dozens of PDFs and videos on municipal bonds.
The benefits of deep education are clear:
- May allow people to benefit from the increasing number of choices available to them.
- Respects their intelligence.
- Allows people to decide independently of advisors and salespeople.
- In theory, people can apply what they learned to a variety of circumstances.
The drawbacks are becoming increasingly evident:
- Education can be expensive, with a short half-life and limited effect on people’s decisions.
- It may not be the optimal use of people’s time. Some people may be satisfied with a good-enough solution or prefer advice from an expert.
- There are bounds to humans’ rationality. There are limits to our memory, calculation and reasoning abilities.
- People are subject to information, choice overload and overconfidence. Sometimes, more information just confirms prior biases. Other times, we may just procrastinate.
The opposite approach is to provide people with heuristics. These are rules of thumb that allow people to make decisions faster, with little information, understanding, deliberation or analysis. For example, people use the Farmer’s Almanac for planting, the food pyramid (now “MyPyramid“) to plan their diet, target date funds for retirement investing and, as some countries do, making organ donation the default choice, relying on humans’ default bias to achieve the desired policy outcomes. An intervention among micro-entrepreneurs in the Dominican Republic found that rules of thumb worked much better at improving business practices than accounting-based training. The benefit was greatest for those with less education or motivation.
The benefits over deep education are pretty attractive:
- People can make decisions without becoming experts.
- Inexpensive to offer and faster to implement, which can reduce procrastination.
- Simple information is easier to remember.
- Easy to communicate over a variety of channels; scalable.
While heuristics can be the best choice in some cases, say when time is short or the difference in outcomes between different choices is not very great, the drawbacks may be under-appreciated. Heuristics:
- Keep people dependent on the information provider. Among the micro-entrepreneurs mentioned above, there was not “…any strong evidence of…increases in knowledge and understanding.”
- Can be a rigid, one-size-fits-all approach and overrelying on them may lead to underinvesting in education.
- Can be less respectful of people’s intelligence and agency.
Decision Tools and Curation
Decision Tools and Curation can be a helpful middle ground between deep education and heuristics. In this approach, an algorithm (or human expert) reduces the available choices to a manageable few and makes comparisons along a few key dimensions easy. In our last article, we discussed how a simple decision tool can take dozens of potential health insurance plan choices and reduce them to just two possibilities, by comparing cost and risk. Our demonstration how-much-can-I-afford-to-spend-on-a-new-home app offers bookends. The top estimate of affordability is that provided by standard mortgage-lender formulas. The bottom estimate is designed to leave a cushion of ten percent of the users’ income for emergencies and long-term saving.
An experiment on Medicare recipients provided evidence that this approach can work. In a randomized-control experiment, researchers sent one group personalized cost information about their Part D prescription drug plan that indicated how much they could save by switching to the best plan for their needs. The control group had to visit the Medicare website for this information. Personalized cost information appears to have caused 28 percent of the study group to switch plans vs 17 percent in the control group, saving an average of five percent or $100 per year.
Decision tools and curation can be a useful third way to improve decision quality and outcomes:
- These are more likely to lead to the optimal decision when they use evidence-based algorithms, without overloading the individual
- Providers can calibrate the amount of education that is provided
- People retain agency and autonomy to make the decisions that appear best for them
- Can calibrate the speed of the decision appropriately (important decisions usually should be made more slowly)
Some disadvantages of decision tools/curation include:
- Expensive to develop
- Less comprehensive education
- Can’t address every scenario
The Bottom Line
The bottom line is that we ought to make decision-making as simple as it needs to be, but not simpler.
The appropriate category of tool will depend on how consequential the decisions are, the time and money available for the intervention, how complex and varied the challenges clients face and the nature of any gap between decision and action. It’s important to guard against self-serving bias: while heuristics maybe the least expensive approach, they may not be the most effective tool over the long run.
According to Katy Davis at Ideas42, it’s important to diagnose the problem: is it the decision or the action to put that decision into practice? She says, “different interventions are effective in different contexts, and the biggest challenge in behavioral design is understanding the context deeply enough to generate an effective solution. And since our intuitions aren’t always correct – testing them!” I couldn’t agree more.
Please comment below, sign up for email updates and share this with anyone who wants to make better decisions. Sign up to try our personal financial planning prototype here. You won’t regret it!
Many thanks to Katy Davis for providing many of the sources and ideas found in this article. Any errors are my own.