How comparisons can help solve impossible decisions for retail investors

How comparisons can help solve “impossible” decisions for

retail investorsJon Hoar, Sept 2012

What do you do when you can’t make a decision?

Why are investing decisions so difficult?

How comparisons help decision-making

How comparisons help decisions-making

How comparisons can make investment decisions easier

We want certainty about, and reward for, our decisions

Certainty

Reward

Immediate Far off

Buyer’s remorse

Certainty

Reward

Immediate Far off

Buyer’s remorse

Certainty

Immediate Far off

Buyer’s remorse

Reward

Certainty

Immediate Far off

Reward

Buyer’s remorse

Focus Focus

Work out to lose weight Experience of exercise

Planned work-out time Planned work-out time

More Less

Source: When thinking about goals undermines goal pursuit. Fishbach and Choi, 2012

Long-term goals as motivation?

Focus Focus

Work out to lose weight Experience of exercise

Planned work-out time Planned work-out time

More Less

Actual work-out time Actual work-out time

34 mins 43 minsSource: When thinking about goals undermines goal pursuit. Fishbach and Choi, 2012

Long-term goals alone aren’t rewarding enough to motivate

Certainty

Reward

Immediate Soon Far off

Buyer’s remorse

How comparisons help decision-making

Venti black filter coffee

Calories 6

Fat 0.1

Saturated fat 0.0

Venti moccha frappuccino, with whipped cream

Calories 437

Fat 14.6

Saturated fat 8.6

We can use comparisons to: choose our morning drink

Source: Starbucks

We can use comparisons to: choose how to burn it off

Source: calorieking.com

We can use comparisons to: find a good walk

Source: walkit.com

We can use comparisons to: find a good walk

Source: walkit.com

We can use comparisons to: choose the right dog

Source: findthebest.com

Can comparisons help investors make confident decisions?

5 oz cup 10 oz cup

Source: Attribute Evaluability, Its implications for Joint-Separate Evaluation Reversals and Beyond. Christopher K Hsee 1993

Continuous factors, like returns, are hard to evaluate

5 oz cup

7 oz of ice cream

10 oz cup

8 oz of ice cream

7 oz8 oz

5 oz cup

7 oz of ice cream

10 oz cup

8 oz of ice cream

7 oz8 oz

10 ozSeparate evaluation

XSource: Attribute Evaluability, Its implications for Joint-Separate Evaluation Reversals and Beyond. Christopher K Hsee 1993

5 oz cup

7 oz of ice cream

10 oz cup

8 oz of ice cream

7 oz8 oz

10 ozJoint evaluation

Can comparisons help investors make confident decisions?

+£558+10.7%

=Continuous factor: Hard to evaluate

How comparisons can make investment decisions easier

We can use comparisons to: assess performance

Welcome Jon, let’s see how you’re doing…

Total value

£5,756Your gain

+£558A fair gain

+£533Your return vs.

Your investment delivered a result better than the fair return benchmark in this time period

Your riskYour returns

12 months

Everyone’s returns

We can use comparisons to: validate our choices

Welcome Jon, let’s see how you’re doing…

Your gain

£558Highest gain

+£807Lowest gain

+£33Your rating

Your investment outperformed more than 63% of people who invested at this risk level

Everyone’s returns Your riskYour returns

12 months

People who invested £100 3 years ago

£85Worst return

£129Fair

return

£186Highest return

We can use comparisons to: self-select risk

Source: InvestorBee.com

People who invested £100 3 years ago

£27Worst return

£139Fair

return

£240Highest return

We can use comparisons to: self-diagnose risk appetite

Aberdeen Managed Distribution

Henderson Managed Distribution

Brand Well known Well known

Morning Star rating Bronze

Suitability Managed distribution Managed distribution

Fee 1.32% TER 1.44% TER

Net return on £100 after 3 years

£146 £148

We can use comparisons to: optimise our choices

Aberdeen Managed Distribution

Henderson Managed Distribution

Brand Well known Well known

Morning Star rating Bronze

Suitability Medium-low risk Medium risk

Fee 1.32% TER 1.44% TER

Net return on £100 after 3 years

£146 £148

Joint evaluation

+18% +11%

13%of members increased

saving rate

50%Increase in

average saving rate

+340%More

responsive campaign

We can use comparisons to: motivate ourselves

Make investments evaluable: eliminate buyer’s remorse

Certainty

Reward

Immediate Far off

Buyer’s remorse

PerformanceRiskProgress

Continuous factors: hard to evaluate separately

Make investments evaluable: eliminate buyer’s remorse

Certainty

Reward

Immediate Far off

Buyer’s remorse

PerformanceRiskProgress

Comparisons enable easier joint evaluation

Thank you

Questions?

How comparisons can help solve impossible decisions for retail investors

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How comparisons can help solve *impossible* decisions for retail investors

How comparisons can help solve impossible decisions for retail investors