The financial-services industry is fond of making declarative statements to savers and investors. You should save at least 10% of your income. You should have 10 times your salary saved for retirement by the time you’re 65 years old. And so on.
But those statements are not the most optimal way to elicit action from savers and investors, according to Ann Kronrod, an associate professor at the University of Massachusetts Lowell and author of the recently published study, How Can Questions Encourage Financial Planning? A Good Question.
Instead, the far better thing to do, according to Kronrod’s research, would be for the industry and financial advisers to ask questions instead of making statements. How much do you think you should be saving for retirement? How much do you think you’ll need set aside at retirement to fund your desired standard of living? And so on.
The reason: Questions increase the cognitive effort put in financial planning, according to Kronrod.
But the current state of affairs doesn’t suggest that people are putting any cognitive effort into retirement planning. Instead, most people — despite the negative personal, economical and national implications of underfunded retirement accounts—do not have sufficient money in these funds, or do not have such programs at all, according to Kronrod.
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What’s more, current efforts to enhance financial planning experience limited success. “One reason for this challenge is that people devote little attention and cognitive efforts to issues that occur far in the future,” wrote Kronrod.
Given that, Kronrod sought to examine a way to increase the cognitive effort that people put in financial planning.
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In an interview, Kronrod talked about her research—which began many years ago with a question from her brother about whether she was saving for retirement — and its implications. By way of background, Kronrod’s brother was “appalled” that his sister didn’t — at least back then — have a retirement account.
“Why would I need one?” Kronrod asked at the time.
After moving to the U.S., she did in fact start saving for retirement and began analyzing emails from the investment firm she uses. Those emails, she said, were largely stating facts, telling her what to do. “And all of these statements,” she said, and then motioned her hand over her head. “Most of us are probably like that,” she said. “And at our age, when we’re not retired yet, and we’re not even close to it and not even thinking about it, that’s exactly the age when we should be thinking about it.”
As for the just-finished study, she sought to answer the question: “How can we make people who don’t want to think about it, think about it, but without really stressing it and telling people what to do?”
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In her research, Kronrod relied on something called psycholinguistic research and tested the suggestion that questions elicit greater cognitive effort, which evokes perceptions that retirement is closer in the future, resulting in enhanced financial planning for retirement. “I measured what happens when you ask questions,” she said.
But first, Kronrod analyzed almost 100,000 tweets posted by 26 financial firms over two years (2017-2019) and found that tweets that were phrased as questions elicit greater online engagement (e.g., retweets) than those formulated as statements.
Next, she conducted a series of five experiments in the lab, online and in the field. And in the experiments, she simulated real decision-making, using small sums of real money and various cognitive effort tests.
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In one study, for instance, the Midwest branch of a large U.S. bank invited its customers to attend a lecture about financial planning and retirement. Some received an invite containing questions and some an invite containing statements. The result: more customers who received the “question” invitation attended the lecture than those customers who received the “statement” invitation, 23 to 8, respectively.
In another experiment, participants (university students) were given $2 in coins (six quarters, three dimes, three nickels and 5 cents). They were told to assume that this sum is equivalent to their yearly salary. After that, half were shown a sign with a question (“When is a good time to invest in your retirement?”) and half were shown a sign with a statement (“It’s always a good time to invest in your retirement.).
And those shown the question set aside more than those who were shown the statement, 49 cents to 39 cents, respectively.
Hardon also asked participants how close they think retirement is, with one being very far away and seven being very close. And when you ask that question, retirement feels significantly closer, she said. “Why is this so?” she asked. “We still need to figure this out.”
The reason has to do with cognitive effort. “It’s not only just thinking about it,” said Kronrod. “It’s finding a solution. And if you’re finding a solution, you’re thinking much more concretely about whatever it is…and concreteness is related to time/distance in this case.”
One takeaway from Kronrod’s research is this: Instead of merely reading and relying on statements about how much to save, ask yourself questions about the topic. Ask yourself whether 10% is the right savings amount. Ask yourself whether having 10 times your salary set aside at age 65 is the right amount of money to fund your retirement. Ask yourself what the right level of risk is to take with your investments given your age, time horizon and investment goals.
“Questions not only increase the cognitive effort, but they also personalize the action,” said Kronrod.
Ultimately, Kronrod noted that her research showed a link between the grammatical formulation of communication, cognitive effort, perceptions of time and resulting decisions. Second, her work contributes to theoretical and practical aspects of understanding the way careful formulation of communication can influence and potentially decrease the problem of insufficient future financial planning. And third, her work provides a cost-effective and easy-to-implement practical solution for a longstanding problem of insufficient investment in future financial well-being.
Bottom line: “As the main trouble with financial future planning is that people do not invest enough thought in their future, questions seem to be a viable way specifically to encourage financial planning behavior,” she wrote in her paper.
