Earlier this month I was presented with the question of how to persuade the 8.6 million consumers in the UK who currently sit on over £10k in cash – a figure uncovered by the Financial Conduct Authority – to invest in the capital markets.
The intuitive response – and indeed the one embraced by my correspondent – was to talk to them: find out what makes them tick; address their concerns; recognise their goals and ambitions; talk to them in plain English. Yet, my first thought was to seek to reduce their loss aversion.
You see, every change from the status-quo raises the prospect of future gains or losses. As the average human being perceives the prospect of a loss more than twice as keenly as that of a gain, this means that even an investment with a 65% chance of profit might appear unattractive.
In the long-term, many investment products comfortably overtake that probability of success. But in the short-term…?
Consider a 2016 study by Maya Shaton while she was at US Federal Reserve.* She investigated the impact of a change in the rules concerning the way information on retirement funds was displayed to Israeli savers.
Prior to 2010, providers displayed the previous month’s performance in a prominent position on their monthly reports. Then, a change in the regulations prohibited the presentation of any historical returns over a period shorter than 12 months. The one-month performance was still accessible (as was performance over any other period), but it was not prominently displayed.
The result was that investors were less frequently exposed to past performances that reflected the losses they were excessively averse to. Net flows into riskier retirement funds subsequently increased significantly.
Using the typical portfolio allocation and conservative assumptions as to the amount saved for retirement, Shaton estimated that “the policy change could possibly result in an increase of 10%-20% in total accumulated wealth at retirement for an average household.”
I suspect one would need to do a lot of talking to get a 10%-20% increase in the wealth of 8.6 million UK savers.
* Shaton, Maya (2016) The Display of Information and Household Investment Behavior.