Morningstar Magazine - April/May 2018 - 36

Spotlight: Behavioral Finance

EXHIBIT 2

Forgetting Curve The rate of memory decay drops off quickly.
Memory Recall Over Time

Retention
100%

75

50

25

uncouple our emotional and financial lives.
By understanding which areas of psychology
have been shown to affect financial decisions,
advisors can target their coaching efforts
more efficiently.
Where to Find Help

While financial knowledge matters, it is insufficient
for changing behavior, especially when other
mental factors work against our better judgment.
Morningstar has developed several resources to
help advisors learn about the areas of psychology
that give their clients the best chance of
overcoming impulsiveness and developing a
healthy attitude toward money.

0
1
2
Days

3

4

5

6

7

8

9

10

11

12

13

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15

Source: Morningstar.

3 Note:
Use the
parent
(oncetothe grieving has
The death
numberofofafunds
is scaled
100
in each five-year
subsided)
to teachperiod.
the importance of wills

and trusts in your client's own estate planning.
3 If market fluctuations generate anxiety for some

clients, consider it a moment ripe for teaching
the purpose of diversification.
3 If a client has a windfall, there may be an

opportunity to show the long-term benefits of an
early mortgage paydown or a one-time lump-sum
retirement contribution.
There are thousands of small decisions that people
make that require financial knowledge. Just-intime information can benefit clients immensely by
helping them avoid unnecessary losses or
predatory products. The downside to just-in-time
education is that it can be hard to anticipate
which choices people will face at what time.
Advisors are in a unique position to foresee these
changes and offer just what clients need to
know at just the right time.
2 Use Psychology to Enhance Memory

Even with the best timing, memories decay. Here,
we can turn to research on teaching and
memory for additional tools to boost the likelihood
of memory retention over time.

36

Morningstar April/May 2018

Make It Emotional
We are more likely to remember things that are
vivid and emotionally charged. For example,
consider a client who has been offered a jumbo
loan with a variable interest rate. Instead
of simply explaining that a variable-rate mortgage
may cost her more than a fixed rate in the
long run, it may be more helpful to ask how she
would feel if she had to abruptly change her
lifestyle, or else face foreclosure.
Use the Self-Generation Effect
Information is better remembered when it is
generated from our own minds. Helping
your clients remember an important concept may
be as simple as asking them to put it into
their own words.
Coach the Whole Person, Not Just the Portfolio
Behavioral coaching goes beyond portfolio
management to work with clients on developing
and maintaining their motivation, fostering
a sense of financial empowerment, and helping
them create a vision for their financial
future in which they are emotionally, as well as
financially, invested.
Most financial advisors already act in a coaching
capacity, because it is impossible to completely

These tools are available (at no cost) on our
Behavioral Insights page at http://www.
morningstar.com/company/behavioralinsights.
More tools are being added as our
research continues. K
Sarah Newcomb, Ph.D., is a behavioral economist
with Morningstar.

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http://www.morningstar.com/company/behavioralinsights http://www.morningstar.com/company/behavioralinsights

Table of Contents for the Digital Edition of Morningstar Magazine - April/May 2018

Contents
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