By Barbara O’Neill, Ph.D., CFP®, AFC®, firstname.lastname@example.org
Personal Financial Managers (PFMs) often encounter strong emotions associated with clients’ use of money. The Military Families Learning Network personal finance team recently held a webinar that included information about behavioral finance biases and recommended financial counseling techniques.
Below are ten webinar take-aways:
- Present Bias– Human beings tend to over-value immediate payouts over future ones; i.e., a present bias. This is an instinctive response. Behavioral economists call the tendency to choose a smaller-sooner reward over a larger-later reward “hyperbolic discounting.” For example, when offered $50 today or $100 in six months, most people take the $50.
- Temporal Myopia– Decisions that determine outcomes across multiple time frames are difficult and stressful. Stress reinforces present bias and leads to temporal myopia, an inability to consider long-term impacts when making choices. An analogy is visual myopia, where things that are farther away are harder to see. With temporal myopia, outcomes that are farther out in time seem less real. Procrastination often occurs.
- Stress Impacts Decisions- Negative consequences of stress include health outcomes, psychological well-being, interpersonal relationships, and poor decision-making. Researchers have found that people experiencing acute financial stress often experience “mental bandwidth poverty.” It is almost impossible to think about the future if stress-causing events require their full cognitive capacity, which is a finite resource.
- Two Types of Decisions– Instinctive decisions are fast, impulsive, and automatic and involve very little mental processing. They are often used in first impressions. Reflective decisions are slow, thoughtful, and analytical and involve the neocortex, the rational or thinking part of the brain. Reflective decisions by clients usually only occur after a client-professional relationship is established.
- Client-Centered Therapy (CCT)– Three basic CCT principles that financial counselors should follow are 1. Congruence (being authentic), 2. Unconditional Positive Regard (offering acceptance without judgement or advice), and 3. Empathy (understanding a service member’s perspective).
- Open-Ended Questions– Financial counselors learn more and get more detailed information from clients by asking questions that cannot be answered with a yes/no response. Good words to use in formulating open-ended questions are the 5 Ws (Who, What, Where, when, and Why) and prompts such as “How” and “Tell me.”
- Active Listening– Paying attention to what clients are saying both verbally and non-verbally is critical for financial counseling success. Active listening includes attending to what is said and interpreting back to a client what a financial counselor hears. Good phrases to use include “It sounds like…” and “It seems that…”
- Scaling Questions– Asking clients to rate something on a 5- or 10-point scale helps establish the relevance of financial goals and gauge progress toward goals as seen through a client’s eyes. An example of a scaling question is “On a scale of 1 to 10, how would you rate your personal finances?”
- Following Up– Ask two follow-up questions to scaling questions: “Where would you like to be on the scale?” (to determine what clients think is possible) and “What is one small thing you could do today to move up even half a point on the scale?” (to help clients develop action steps).
- Silence is Golden– A brief period of silence after asking clients a question communicates a financial counselor’s patience and gives clients a chance to collect their thoughts before responding. This technique should be used strategically when it makes sense.