Does a participant’s distorted view of her or his ability to make wise financial decisions matter? And does it affect the participant positively or negatively?
Data show that the answer to the first question is yes — confidence matters and can affect participants both positively and negatively, says Warren Cormier of the Boston Research Group. “We find that as people are more and more overconfident in their ability as financial decision makers, they are more likely to take actions. Of course, this can be both positive and negative depending on the seriousness of the consequences of the action,” Cormier notes in his column in the most recent issue of NAPA Net the Magazine. “Within the typical DC plan, however, we see relatively restrictive boundaries of what participants can do to hurt themselves. Therefore, in the context of a DC plan, it is relatively positive to be more proactive rather than less proactive.”
Research shows that that overconfidence is causally related to participants’ taking three important steps, Cormier notes:
• contacting the record keeper to ask questions or get information and guidance;
• purchasing more products from the record keeper; and
• determining how much in assets must be accumulated to have a secure retirement.
Conversely, participants who lack confidence are more likely to be frozen by indecision and therefore less likely to take the actions cited above.
So what should we do with these insights? “Clearly there are educational implications,” says Cormier. “Education focused strictly on facts and data has limited behavioral impact unless the participants’ confidence is elevated at the same time. As change agents, advisors need to show participants the impact of their past decisions by giving them regular and unambiguous feedback on how they are doing so they can incorporate that into their sense of confidence.”
Consequently, says Cormier, it is necessary to keep in mind that education focused strictly on facts and data has limited behavioral impact unless the participants’ confidence is elevated at the same time. “As educators and behavioral change agents, we need to ensure that the education is not only giving them more objective knowledge, but improving their subjective knowledge — leading to greater knowledge and propensity to act — as well. We need to train calibration — to show participants the impact of their past decisions by giving them regular and unambiguous feedback on how well they are doing so they incorporate that into their sense of confidence.”
Cormier’s most recent “Inside the Plan Participant’s Mind” column is here; a pdf of the entire 64-page spring issue of the magazine is here.
