There are different interventions and policies to protect investors from their worst tendencies, ranging from enhanced disclosure to more behaviour-oriented nudges. But as effective as such methods are, they may not be enough to get to the root of the problem.
In a blog post published by the CFA Institute, Markus Schuller, an 18-year investment veteran and founder of Monaco-based consultancy Panthera Solutions, explained that many applications of behavioural insights arouse people’s instincts and intuition, which are based in the brain’s limbic system. But those applications, he argued, don’t create empowered decision makers.
“Once the source of arousal fades, so too does the need for an immediate response,” he said. “Empowering an individual over the long term requires a more conscious form of development.”
Adapting a framework by Greg Davies of decision-science firm Centapse, he said simple interventions such as disclosures and disclaimers, traditional education like seminars or speeches, and systemic nudges like auto-enrolment in a pension plan may lead to good decisions, but they don’t empower people to change. For that to happen, there needs to be more engaged choice, which can be facilitated through just-in-time education and gamification approaches.
The standard change model for individuals to follow, he added, can be characterized as “dysfunctional” because it relies on two unrealistic assumptions: that people can consistently apply their willpower, and that directly changing problematic behaviours into desired behaviours can lead to success.
Rather than requiring people to exert willpower, Schuller said a framework for conscious development should minimize the need for willpower. That can be done by helping people focus on “want to” goals rather than “have to” goals, or structuring their lives so that they won’t have to exercise self-control in avoiding bad decisions (“choice architecture”).
He also stressed the importance of “narrative identity,” the unwritten, unspoken, and unconscious story that a person uses to define himself. Starting with a conscious set of beliefs, he said, people can rewrite the stories they tell themselves about themselves.
“A lasting and more conscious form of change requires rewriting our narrative identity,” he said.
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