Do financial risk warnings warn? Or do they just give the appearance that something has been done to protect customers, while not really protecting them at all?
If you work within a regulated or licensed environment you’ll often face the challenge of helping customers to make good choices, or encouraging good financial behaviours. In this, the first of two blogs on the topic, we take a closer look at why financial ‘health warnings’ might not work as intended.
Firstly, they run counter to what we know about:
- The psychology of human risk perception.
- User experience and how people consume information on screens.
To be successful, warnings need to pass three steps. They need to be:
- Acted upon
Good road signs do this for drivers who have to quickly react in a fast moving environment.
Here be (financial) dragons
“The value of your investment can go down as well as up” is a message that we believe fails all three steps.
1: It’s not a warning if you don’t see it
There is no point saying “danger” quietly. This message is repeated over 3,100,000 times on UK sites (according to Google). It’s repeated so often chances are it’s rarely seen.
We know that if you insert an unobtrusive block of copy into a bigger block of copy – and make that copy technical and complex, it is the perfect recipe for a message not being seen. Equally, putting it at the end of a page, out of the flow of the main text, also makes it more unlikely the text will be read.
2: It is not a warning if it is not understood
This statement attempts to warn of the potential volatility of the stock market; “The value of your investment can go down as well as up.” On one level, it is true, but that doesn’t make it a successfully understood risk warning. Risk is a function of hazard and exposure.
Saying your investment can go down as well as up only describes the hazard, it does not explain your exposure. Without clarifying exposure, it can be either needlessly alarming or brushed aside as irrelevant. Your investments may go down. You may die tomorrow. The world may end. Without knowing your exposure, these are just Jeremiah messages of doom and gloom.
Exposure transforms the risk. Not much invested in the stock market? Less risk. Investing long-term? Less risk. Actively managed rather than algorithm driven? Less risk.
Without outlining your exposure, warning of risk is no better than a Daily Mail story warning that everything gives you cancer, even Nutella (e.g. Could Nutella give you CANCER? (Daily Mail 11 Jan 2017. Capitals in the original).
3: It is not a warning if it can’t be acted upon
“Past performance is not a guide to future returns. The value of investments and income from them may go down as well as up and you may not get back the amount invested. Your capital and income are at risk.”
Shouting “DUCK!” at someone too late for them to duck is not a warning. This is not a message that can be acted on. If past performance is not a guide, what is? If my capital and income are at risk, what should I do about that? How much may it go down by? How can I avoid or minimise the risk? Yet these are not unknowns.
How do we guide people? Especially given we know that a great many don’t know much about finance. The FCA’s FAMR report (March, 2016) highlighted that 1-in-5 cannot read a bank statement, and a third cannot work out interest on savings. (Pretends to stare out of the window.)
Sometimes, it is suggested that you speak to a financial adviser. But the high cost of advice has created an adviser gap for mass affluent customers. Robo-advisers, providing digital advice based on rules and algorithms have been touted as a solution for this gap. However, this will not necessarily help with current ineffectual risk messages.
What we have now, but better – won’t help
We could try to write better risk warnings, but human psychology is still going to make that difficult. Those familiar with the tenets of behavioural economics will be aware of the following biases at play here.
Optimism Bias: It won’t happen to me!
People are hardwired to be optimistic about the probability of positive events happening to them. Obviously, that comes with a huge plus: we live with far fewer cynics and pessimists in the world. We hugely underestimate the chances of getting divorced, losing our job, and overestimate our lifespan. We hope that the future will take care of itself. It will all turn out fine in the end.
This makes it very hard for risk messages – even good ones – to hit home. We are all better than average drivers, so naturally we can pick a better than average investment plan.
The Illusion of Control Bias
Driving feels safer than flying for many because we feel in control. The illusion is that we could do something, or at least have some influence, if there was a problem. Actually, driving is 100 times more deadly (and much more so if you only count commercial passenger airplanes).
People who invest and make their own choices will naturally have the illusion of control.
Coupled with optimism bias, the illusion of control is a cocktail for ignoring many warnings. Especially if they are generalised, abstracted ones.
Abstraction is weaker than touching
If you said, “Amy invested all her savings into a medium risk emerging markets, but she was ruined when political instability hit the countries she invested in. Don’t let it happen to you!” It would have a higher impact than a neutral, emotion free, “can go down as well as up” message; especially with a photograph of a downcast Amy. Obviously the answer must strike a balance – and therein lies the future challenge. How do ethical brands with core brand values of transparency and honesty move forwards?
In part two of this blog series, we’ll be looking at how to design warnings that warn. If you want to ethically protect your customers and help them make good choices, we would love to hear from you.