C-3PO: Customer - Problem, Psychology, Product, Observe

Problem

The financial world is an incredibly complex place for consumers which creates a vast array of problems. It’s full of policy-driven products, such as the Lifetime ISA and people-driven products, that aim to help consumers navigate policy, such as Nude and Moneybox, who have simplified the process of saving for your first home.?

Quite often, conflict exists between policy and people products, causing confusion around the problem to be solved. This can lead to companies building products and services that don’t solve problems because they’re bound to the structure they exist in, creating knowledge biases.

The big question, therefore, is how can we better define the problem and solve it, rather than jumping straight to the solution?

First-principles

One way of conquering knowledge bias is through adopting first principles thinking. In layman's terms, first principles thinking is the practice of actively questioning every assumption you think you know about a given problem or scenario — and then creating new knowledge and solutions from scratch. (1)

As a worked example, think about financial literacy - defined as the possession of a set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources. (2)

Identify and define the current assumptions

A commonly held view is that there is a financial literacy crisis; that there is a need for people, predominantly younger people, to receive ongoing financial education to prepare and upskill them on the various complex financial products, services and situations that they face in today’s world. In fact, so often is financial literacy referenced in opinion pieces, that it’s now become a common excuse in the financial services sector as to why people aren’t engaged with their finances; or rather, the product that a company is trying to sell them.

So, what’s the real problem that’s facing a generation of savers, spenders and debtors?

Breakdown the problem into fundamental principles

Using the first principles approach, the question to be answered is “why are products and services so complex that people need to be educated to understand them?”

If we look back 40-years the financial world was a decidedly different place. An example of this is saving -- if you wanted to save money, you would put your spare cash into a savings account; and with an interest rate of 8.9% (the annual average of interest rates applied to UK savings accounts in 1981) you’d see that money grow steadily year on year.

This is a good example of how a problem can be broken down into a fundamental principle. Rather than thinking that people need financial education to help them navigate complex products, the question should be ‘why are financial products so complex?’. Principally, simple financial products are easier for people to understand and use - in the case of the 1981 saver, you just needed to put your money in a savings account to grow your savings. There’s no real need to understand interest rates, how compounding works - the savings account provided a straightforward way to achieve ‘security’ and growth.

Through applying this fundamental principle, the financial world, and the products that exist within it take on a different shape for those that rely on and engage with them (all of us). No longer is there a need for continued and sharp up curves in knowledge, no longer do consumers face decision paralyses because of the range of options - keep it simple.

Modern problems require modern solutions

Now, I don’t want to spoil the inevitable surprise to come but as the now infamous saying goes “modern problems require modern solutions”.

If you understand the problem, truly, then creating a solution is a whole lot easier.

Psychology

The second piece of the puzzle is psychology. Intrinsically linked to the problem (the what), psychology is the ‘why’.?

Like pieces of a puzzle, without putting them all together, you aren’t able to see the whole picture. With that in mind, consumer, or more accurately, human behaviour is an equally important element in this particular picture. To reference the Nobel prize-winning psychologist and (behavioural) economist Daniel Kahneman, (and Amos Tversky’s who would have received the Nobel prize had he not died in 1996) prospect theory (3), and Daniel Kahneman’s book Thinking, Fast and Thinking Slow (4):

• “Investors value gains and losses differently, placing more weight on perceived gains versus perceived losses.”
• “A general “law of least effort” applies to cognitive as well as physical exertion. The law asserts that if there are several ways of achieving the same goal, people will eventually gravitate to the least demanding course of action.”

Investors place more weight on perceived gains

An example of this, as discovered in Daniel Kahneman and Amos Tversky’s study, an investor presented with a choice, both equal, will choose the one presented in terms of potential gains eg. “there’s an 80% chance of you making some return on your investment”, as opposed to, “there’s a 20% chance of you making no return on your investment”.

Essentially there are two phases that people go through when decision-making under a condition of risk:

1. Editing or framing - which means that a person’s choice can be affected by the order, method or wording in which it’s presented.
2. Evaluating - this has two elements -- (i) value or rather the future level of aspiration and (ii) the weighting placed on the perceived certainty of an outcome i.e. whether it’s perceived to be guaranteed or impossible.

So, how do these psychological factors play out in the financial world today?

Editing or framing

It’s safe to say that throughout 2021, there have been two c-words that have dominated mainstream media. The first, of course, is covid-19. The second will arguably be even more important in shaping the future of the human experience - cryptocurrency.

For many, cryptocurrency is an intriguing product, one, that regardless of your knowledge of the concept, underlying technology or applications, is likely to spark debate amongst your peers.?

In terms of framing, there have been two schools of thought - one that investing in cryptocurrency will lead to you losing all of your money or that it’s worthless (see quotes from Bank of England Governor, Andrew Bailey, and J.P. Morgan Chairman and CEO, Jamie Dimon, respectively). The other school of thought is that it’s the future of money (both from a currency and underlying technology perspective), a logical replacement for gold and will continue to increase in value (see every other Elon Musk tweet).?

Looking at this through a positive lens only, the price volatility provides a huge potential return for would-be investors. Access to crypto exchanges are now prevalent, and mainstream media (again, through the positive lens only) is full of ‘get rich quick’ stories.

Onto evaluating.

Evaluating

As mentioned earlier, since the early ’80s, financial products have become more complicated, savings in the bank barely offer a return and the cost of living has increased considerably. Although much has changed in terms of access, the gen-x and millennial generations have grown up with the same aspirations as their parents and grandparents, seeking similar, if not the same commodities and lifestyles, which due to various economic factors will be out of reach for many.

Given the hockey stick like up-curve that cryptocurrencies, such as Bitcoin have taken, combined with analysts (again, only through a positive lens) predicting prices reaching astronomical levels through 2022, many will feel certain about their chances of making some return on any investment that they choose to make.

Product

We’re often told that it isn’t what you know but who. In this case, through a deep understanding of the problem and human psychology, we gain an intimate understanding of people - this gives us the foundation for our product.

KISS?

Keep it simple, stupid.?

As we’ve established, the vast majority of consumers find financial products confusing due to cause and effect. Simply put, the cause is complexity, whether that be the number, variety or design of products; the effect is confusion. If you’re like me, you believe that the best way to solve this equation is to remove the cause, preventing the effect, given that we know that there’s a direct correlation between making simple products and services and increased comprehension - so why aren’t we all building products this way?

Superior product complex

The dichotomy between policy-driven products and people-driven products is a great example of what I like to call a ‘superior product complex’.?

Simply put, people fall in love with the solution without fully understanding the problem. From a policy or regulation perspective, this plays out in two-dimensional thinking - looking at the past and present-day problems and devising a solution that attempts to solve those with little consideration for the future. An example of this is pension-freedoms in the UK, where people can now access their retirement savings sooner than before. Whilst this results in some positive outcomes, spending sooner means less money for later or working longer to fund retirement. People-driven products often suffer from a similar flaw, only considering the present-day problem, with very little consideration for what the future state will be; the introduction of credit cards meant that people could be more aspirational with their finances, often buying things that they otherwise would have had to wait months or years to afford. The negative result of their introduction sees millions of people around the world in perpetual debt because the solution didn’t consider the full extent of the problem.

Four dimensions

Products, in a similar way to the world, have four dimensions. Each of these needs to be considered when building solutions. In this case, there are three that relate to time: The past - where have we come from? The present - what’s the issue that the consumer is facing now? The future - what is the outcome that we’re trying to help them achieve? And one that relates to space: What adjacent opportunities or problems might the product create?

In the case of the credit card, it solved the product of affordability - the problem it failed to see (or the cynic in me would say ‘deliberately caused’) was the evaluation that I referenced earlier, where aspirational characteristics drive behaviours.

A great product doesn’t create new problems - it solves them. There’s an elegance to great products - much in the same way as millions of species around the world have evolved to be the masters of their habitat, a great product gives you exactly what you didn’t know you needed, efficiently and effectively, and leaves you wondering how you managed without it.

Observe

So, you’ve done the hard yards, you’ve been clear in identifying the problem using first-principles thinking, you’ve considered the behavioural factors that will directly impact how the product is perceived and used. You’ve developed a solution that’s simple and considers lessons from the past and present, and set clear intentions for the future, as well as factoring in any adjacent considerations - YOU’RE ALL SET!

Ah… but wait… how do you know if it’s great?

Notice or perceive (something) and register it as being significant

Irrespective of your preferred development methodology (you say Agile, I say Lean), one thing is certain - quality products need to be validated through people using them. Without observing users making their way through your product, understanding the behaviours you create and where refinements in the journey can be made, your product is destined to become obsolete because as Benjamin Disraeli famously said “change is inevitable”.

So, pay attention, make changes with purpose and continue to evolve your thinking and your products to solve real problems.

PS. Apologies if you came for Star Wars content.

References

1. https://medium.com/the-mission/elon-musks-3-step-first-principles-thinking-how-to-think-and-solve-difficult-problems-like-a-ba1e73a9f6c0
2. https://g.co/kgs/foyAUW
3. https://www.investopedia.com/terms/p/prospecttheory.asp
4. https://www.waterstones.com/book/thinking-fast-and-slow/daniel-kahneman/9780141033570