If you’re a rational decision maker, then you are not exactly normal. According to Grattan Institute executive John Daley, most consumers are not rational decision makers. We respond to various stimuli and often buy products which are inappropriate to our life circumstances.
We Ignore Small Print
Apparently when it comes to deciding on investments we usually ignore information that is too long or complicated but we are influenced by short, simple messages in large type. Is this why warnings to ‘seek independent legal advice’ are written in small letters at the end of a very long and detailed document?
Investor Bias is Not Rational
Most financial products, whether share offers, mortgages, managed funds, insurance products or guarantees I’ve come across are served up with thick documents written in legal-speak and printed in small type.
Having a clear summary of the risks or negative factors at the beginning of the offer document would make decision making so much easier and faster.
Daley argues that Government could protect investors by recognising that most of us have a bias towards :
- short-term gains,
- aversion to loss
- resistance to change
- copying what others are doing
Three Main Risks Written in Large Print
In recognizing these biases Daley suggests that government could legislate for disclosure statements to advertise the three main risks associated with the product offered These risks need be written in the largest typeface in the document.
This is a very sound idea. If the three most serious risks were written in the largest font in the front of the document we investors could hardly ignore them. There would be a better chance for us to take the warnings to heart.
What is the True Cost ?
Going even further, why not demand that providers advertise the true cost of a product – including all fees – in a prominent manner? Imagine being able to easily compare the true costs of mortgages, managed funds, loans and life insurance funds.
Read The Small Print
It will be interesting to see what comes from John Daley’s address to The Governance Institute of Australia’s national conference.
We are influenced by messages that are short, simple and in big type.Watch for your bias next time you’re reading a financial offer document. Once you’re aware, you can sense if you are being manipulated.