Financial Services

How cognitive biases impact investors’ decisions to create financial plans

By Abhay Patil, and Nick Phillips

Oct. 19, 2020 | Article | 5-minute read

How cognitive biases impact investors’ decisions to create financial plans

A growing body of research suggests cognitive biases affect our perceptions and everyday decisions. Financial services firms have recognized this and are now studying biases and how they affect investors’ and advisors’ decisions. These studies most often ask investors to name the biases they face, but this approach presents two challenges: one, investors can’t recognize their own biases, because they’re subconscious, and two, financial firms struggle to link insights to clear and measurable outcomes and actions.


ZS set out to remedy this by studying how biases affect investors’ decisions to create financial plans. In short, we found that cognitive biases do exist in financial planning and client-advisor interactions, and likely affect decisions and time to take action. Because biases are not always intuitive and, as subconscious drivers, we’re not usually aware of their presence, we took a careful process of controlled, statistical A/B testing to tease out which biases are relevant and what their impact may be.


We found six biases that have a statistically significant impact on investors taking action to build a financial plan. By addressing these biases, financial services firms can improve their rate of financial planning by 15%—without the need for incentives or added sales capacity. 


The six areas of bias are:

In addition to confirming the statistical significance of six biases through A/B testing, we tried to understand how investors think about their advisors using embodied cognition. Knowing how investors typically think about a firm’s advisors can shed light on what’s holding them back from behavioral change. Unsurprisingly, some thought of their advisor as a “used-car salesman,” despite evidence of a true coaching relationship.  

To quantify the impact of the biases, we presented investors with scenarios and tested their willingness to schedule a meeting with their financial advisor to establish a plan. For example, in testing social norms bias, we found that investors were more likely to create a financial plan when they were prompted with statistics that suggested a majority of their peers had done so, all else being equal. People inform their decision making by what they perceive others are doing.

The implications of identifying this bias in an investor can lead to new strategies and customized approaches to service client needs and keep them engaged. As an example, a broker-dealer or wirehouse can conduct polls across geographic locations and various demographic sets to provide advisors information surrounding observed social norm on plan participation. Advisors can then increase the likelihood investors will create a financial plan and help them build it by providing social norms data on other clients in similar financial situations (for example, telling them that 40% of investors with their wealth have built financial plans by their age).


Our research highlighted the blind spot of subconscious human decision making in two ways. First, it confirmed which biases impact investors’ decisions in ways we might expect, such as making decisions based on their informal understandings of what’s normal (social norms bias) or their subconscious preference to do something (action bias). Secondly, our testing revealed that some biases influence investor decisions, but in nonintuitive ways, such as investors’ disinterest in delaying effort when managing their finances (the opposite of hyperbolic discounting). 

What are the key takeaways for firms?

  • Biases are active and impact investors’ financial decisions, not always in intuitive ways
  • These biases can be measured, quantified and isolated to segments of investors, which can then be used to find ways to nudge them to create financial plans
  • Confronting biases improves financial planning and mutually benefits financial firms and their clients

We’re working on research on how firms can bring long-term behavioral changes to their advisor base as well. Stay tuned for more in a follow-up article. 

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