TGBA #40: Paving the Path: Working with the Elephant

Welcome to the 40th edition of #theGoalsBasedAdvisor Newsletter!

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What use is a bus stop that no bus actually stops at??

This might sound like a riddle, but it’s a real scenario in Germany. Some cities have introduced phantom bus stops to help Alzheimer’s patients who might wander away from care facilities. The idea is simple yet brilliant: these patients often retain their memory of previous homes and suddenly get the inclination that it is time to go ‘home’. By placing these bus stops near care facilities, patients find a safe place to sit and wait for the bus to take them home, making it easier for caregivers to find them and bring them back. This is a perfect example of choice architecture in action.

In a previous edition of this newsletter [TGBA #11: Unlocking the Secret to Achieving Your Investment Goals - The Rider and the Elephant], we explored Jonathan Haidt's metaphor of the Rider and the Elephant to understand how our rational and emotional sides interact when making financial decisions. The Rider, our rational side, may set the direction, but it's the Elephant, our emotional and instinctive side, that has the power to move us forward. To achieve our goals, we must pave a path that works with our Elephant rather than trying to overpower it.

Paving the Path for the Elephant

The challenge, then, is not to overpower the Elephant but to pave a path that works with its natural inclinations. This approach can be seen in various aspects of behavioral economics and choice architecture. For instance, Nobel-laureate Richard Thaler’s "Save More Tomorrow" program counters our natural tendencies to procrastinate and avoid loss. By committing to increase their savings rate with each future raise, employees find it easier to save because it doesn’t affect their current standard of living. This is a practical application of Haidt’s concept of making the journey easier for the Elephant.

Financial advisors are uniquely positioned to act as choice architects for their clients. By understanding the interplay between rational planning and emotional behavior, advisors can design strategies that work with their client’s natural tendencies rather than against them. This involves more than just providing financial advice; it requires a deep understanding of human behavior and the ability to create an environment that makes good financial choices easier and more automatic.

Real-World Applications?

Here are some strategies to pave the path for the Elephant:

1. Automate Savings and Investments: Automating contributions to savings and investment accounts can help clients save consistently without having to make frequent decisions. By setting up automatic transfers, the process becomes effortless, reducing the friction that might prevent clients from saving regularly.
2. Simplify Decision-Making: Presenting clients with too many options can lead to analysis paralysis. Instead, advisors can narrow down choices to a few well-curated options that meet the client’s needs. This reduces cognitive overload and makes it easier for clients to make decisions.
3. Goals-Based Planning: Help clients connect their investments to their personal goals. Whether it’s saving for retirement, funding their children’s education, or buying a home, linking financial goals to emotional aspirations can motivate clients to stay on track. The emotional connection gives the Elephant a compelling reason to follow the Rider’s plan.
4. Visual Progress Tracking: Providing clients with visual tools to track their progress towards their goals can be highly motivating. Progress bars, charts, and milestones make the abstract concept of saving and investing more tangible and satisfying, encouraging continued engagement.
5. Behavioral Nudges: Use nudges to encourage positive financial behaviors. For example, setting default options for higher savings rates or periodic reminders to review and adjust investment portfolios can guide clients towards better financial decisions.

Just like the phantom bus stops provide a safe haven for Alzheimer’s patients, financial advisors can create environments that guide their clients towards better financial decisions. By paving the path for their clients’ Elephant, advisors can help clients achieve their investment goals with less effort and greater satisfaction. In the end, it’s not about fighting against our nature but working with it to create a smoother journey towards financial success.

By embracing the principles of choice architecture and behavioral economics, financial advisors can unlock new levels of effectiveness in their practice, ensuring that both the Rider and the Elephant are aligned on the path to achieving their clients' financial goals.

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