Super Informed Radio episode #3: Decisions, decisions
|Disclaimer: What you're about to read is of a general nature and doesn't take into account your personal financial situation, needs or objectives. We recommend you seek financial advice before making any decisions about your super and consider the relevant UniSuper product disclosure statement.
Marta: Hi there, and welcome back to another episode of Super Informed Radio, the UniSuper podcast. Hope you've enjoyed listening to the first couple. We'll jump straight into it. I'm Marta.
Rob: I'm Rob.
Lyndon: And I'm Lyndon. And as Marta said, we are back and it's February 2017. How that happened, no one quite knows. It's come around very quickly but we've got a great podcast for you today. We've got an interview with Professor Peter Bossaerts.
Marta: Yeah, he's from the University of Melbourne and the first UniSuper member we've actually interviewed. So we're very excited about that.
Lyndon: And his area of expertise is financial decision making.
Marta: Yeah, and the science behind it.
Lyndon: And Rob, who did you and Marta catch up with?
Rob: We had a chat with Trevor Schmid who is the manager of the Financial Advice Centre here at UniSuper. He is going to basically simplify the various levels of advice that members can access here at UniSuper, and also talk about the new and exciting initiative that they're about to launch.
Lyndon: Fantastic. Shall we jump straight in?
Marta: Let's do it. So when you make a decision about what airline to fly with or how to invest your super or savings, what's actually going on in between your ears? One of our members and experimental finance and decision science researcher Peter Bossaerts, says there's actually a lot to be gained by looking at how the underlying neural activity works when making decisions.
Peter's currently the Professor of Experimental Finance and Decision Neuroscience at the University of Melbourne's Brain, Mind and Markets Lab.
Peter, thanks for joining us.
Peter: Thank you.
Lyndon: So Peter, how actually is a decision made?
Peter: That's actually a very good question because for most economists and finance academics, a decision is you just maximise some utility subject to some budget constraint. And you somehow have a utility functionality that's encoded maybe in the brain. They don't take this more literally, but that's what they think is...it's a good way to think about choice.
It turns out that this is often not how choice is made, how the brain comes to a choice. The brain uses a process. It starts from the beginning and then ends up usually within a second, maybe couple of seconds, sometimes minutes, or even hours or days and it comes up to...with a decision. If you invest in superannuation funds, of course it may take a little bit more.
Although most people actually make their decisions about superannuation fund investments almost on the...at the moment. So there is a lot to be gained from actually trying to understand what the spur of the moment actually gives you. So the brain actually gets all these stimuli and processes this and there’s a lot of parallel processes that go on in the brain.
Some of them involve emotions, others are just more...a little bit more mathematical, and then it comes up with a decision. These decisions are actually not...usually not that bad. Our brain is extremely well-developed to navigate an uncertain environment.
Lyndon: And so, how did we used to think decisions were made as opposed to how we're learning they're actually made through your research for example?
Peter: So we used to think that decisions were just made instantaneously as a rational maximisation of some utility function with some constraints, and the constraints are basically budget constraints. But if we now go further, we don't look anymore at that idea of constraint optimisation but we actually look at it as a process, where you get inputs, where you have a particular state of your mind, state of your brain actually, literally, and that leads to certain outcomes.
And that allows us to explain why the same person makes different decisions in two different situations, right? One of the things that the old style decision making couldn't deal with is, it turns out that people when they're...they show that they're indifferent between, let's say two types of beers, right? I grew up in Belgium so my examples are all about beer...
Marta: Totally fine.
Peter: ...or chocolate. So two types of beer, there's this brown beer and there is this pale beer. And I'm pretty much indifferent to that. Most people actually would take long time to decide. Why do you do that if you're indifferent anyway? It should be a flip of a coin. People are a lot faster when they decide between two beers, one of which they absolutely don't like.
And this has to do with the fact the reason why people wait longer is because, as it now turns out, yes they're indiffer-...people are indifferent but they find a preference for one beer over another in a particular circumstance. If I'm for instance in a bar, I like...I prefer the pale beer more. If I'm on my own at home listening to music, I like the brown beer more, right?
So that requires the brain to go back into memory, an episodic memory, and try to figure out what is the best match at this time? That is completely left unexplained in the traditional theory because there is no space for considerations like that
Marta: I read somewhere, Peter, that sometimes people feel more keenly the loss of, like, say an amount like $10 or...versus the gain. Does your research...would you say that's true or has research come around that disputes that theory?
Peter: So you're referring to loss aversion, right?
Marta: Yes, I believe so. Yeah.
Peter: So there is one aspect of this theory that is extremely important to understand, how it was a break with the past decision theory. And that is people make decisions relative to a reference point, right? The loss aversion comes in when you actually hate drops throughout relative to that reference point more than you like gain throughout relative to that reference point.
Loss aversion is not universal, but a reference point is universal and there's a very deep biological reason for this. Now, the problem with reference points is, and the reason why actually classical decision theory didn't like this, is because you can easily manipulate that reference point as we all know, right? So you can make people too optimistic, you can make them pessimistic. It’s a question of changes in reference points. And so the way you frame, let's say an investment, can have a dramatic effect on whether you're going to invest in it or not. And I must admit that the financial industry has sometimes exploited this in some of their structured products and be able to actually extract more money than they otherwise would.
And so you can sell exactly the same product framed in a completely different way for a much higher price than you would otherwise. And people are unaware of this because it's a manipulation of the biological processes.
Lyndon: We're often trying to help our members engage with their super to make sure they're equipped with, whether it's tools or advice or whatever it is, to make the right decision for their own circumstances. And I think that sort of speaks to a greater issue which is, how engaged people are with their super or not. What do you...why do you think people put super in the "too hard" basket and what could we do to help?
Peter: That's a very difficult question. There're a number of problems with financial, with investments, retirement and savings. One is that most of us are never taught from very young age on what financial risks are about. We are taught from a very early age on about Newtonian physics, not to use a fancy word. But, you know, a lot of us actually know pretty much how physics...the basics of physics works.
We are taught about some basics of mathematics. And so...languages. And so...but we are not taught finance. And then when you get your first job, you at once are asked to make financial decisions that you've never learned about, right? No wonder that people actually are way, way behind. They learn about this at an age that maybe you could almost say it's too late.
It's not true but that's, you know, that's a very serious issue with that, with awareness of... And of course, if you don't understand, you like to not deal with it and that's what you see a lot out there. People want to ignore it. The answer to the question as to why are people not engaged is because it's extremely hard and people are not familiar with it.
Lyndon: Saying something is too hard for someone and they put it in the hard...too hard basket, is there anything in your research that sort of distinguishes between like a passive decision and an active decision?
Peter: Right, so you bring up the issue of awareness and consciousness, right? So what are...what's part of our decisions are conscious? And before you know, you start talking about free will. I actually have decided to work on the easy problems, which is financial markets and financial risk. If you look at financial decision making, enormous amount of processing in the brain, you're not aware of.
This actually brings up a very interesting issue and that's the issue of emotions in financial decision making. I think it's one of the most misunderstood aspects of financial decision making. The general rule is leave out emotions when you make financial decisions.
Marta: Why is that?
Peter: Because people think it's right. This goes back actually to the French mathematician Descartes, who thought that rational decision making and emotional decision making are two separate things. You see this very deeply ingrained in the way psychology is taught. You have a cognitive system and affective system. If you look in the brain, the cognitive and affective system are pretty much one and the same.
There are very few exceptions where emotions don't affect your decision making or the cognitive parts of the brain and vice versa, right. That is extremely hard to disentangle the two.
Lyndon: So now Peter, if you put yourselves in the shoes of a listener to this podcast, they might be sitting on the train on their daily commute or going about their daily lives, what nugget of advice might you be able to give them to help them with their own decision making, be it financial or otherwise? What would you say to them?
Peter: I think one should start from scratch and that is familiarise yourself with financial markets. And overcome this fear that this is all too complicated. People working in the financial industry are often compared to rocket scientists. Let me quote my son, who is a rocket scientist. When he took his first finance class, "Dad! This is easy!"
So it's...there is a fear of course, because of all the jargon we use in finance and the way we explain things. I think some of the basics of finance, we should maybe teach people using games. And if you have access to some trading games or something like that, you should just do it, right. Some of the kids are out there playing World of Warcraft and they happily participate in auctions and so, right?
That, I think it will be u-...very important skills later on when they're gonna be auctioning, be part of an auction or when they're buying a house. Same thing with, you know, in general financial markets, it will be, you know, it will be very good for people to go out and reach out and find ways to familiarise themselves without financial markets, without this pressure of, you know, "I have to invest for my retirement." Let's first familiarise yourself with it.
Just like, you know, we learn to play very important games there in the industry by playing rock, paper, scissors as kids without thinking, "Oh, later I'm gonna become a CEO and I have to run this aerospace company and my rival is called Airbus. And I have to flip a coin of how I'm gonna do this," right?
Lyndon: Well, it sounds like a simplification, dejargonisation, right...
Marta: And going back to the basics.
Lyndon: Going back to the basics.
Peter: And playing games.
Lyndon: And playing games, right.
Marta: And playing games.
Lyndon: Could be the key for our members. Thanks so much for joining us today, Peter.
Peter: You're very welcome. Thank you.
Marta: So Rob, we've just heard there from Peter Bossaerts that people...well, that his research finds that people are often overwhelmed by super and find that there are too many complex words and jargon which can actually impact their financial decision-making abilities. Like they'll chuck it away and sort of put it in the too hard basket.
Rob: Yeah, the too hard basket.
Yeah, so we at UniSuper try to help our members make those decisions. And one of the things that we offer our members is the access to financial advice through our UniSuper advice service. So with us today to talk about how we help members make those financial decisions, we've got Trevor Schmid, who's the manager of our Financial Advice Centre. Welcome.
Trevor: Thank you Marta. Nice to be here.
Marta: Do you think that's true for...was that what you guys find within the advice business?
Trevor: Absolutely, that's quite a common experience, Marta. So we find, I guess, younger members perhaps where super isn't a priority for them and perhaps they just read about super in the media. The government often changes the rules around super and there is a lot of, I guess, jargon around it as well, which makes it difficult to understand, yeah.
Rob: Advice is obviously a service we offer here at UniSuper. There is a perception that it can be a bit expensive. When it comes to younger people and their wanting to, I guess, set up their future goals and advice probably isn't something that they would consider. What would you actually say to them?
Trevor: That's a really good question. I think typically for personal financial advice, it can be quite expensive. There are fees involved for that service. At UniSuper, we're quite lucky in that we have different levels of advice for our members. So we have general advice which won't go into the member's personal situation but we'll provide them with information to help them make informed decisions.
That's offered through our on-campus consultants who're at our university campuses. We also have our financial assessment centre, which is a call centre. So any member can phone through and get help either through factual information or general advice on the phone. From there, if they do need personal advice and recommendations to help them with their personal circumstances, we have simple advice, which is offered through our select advice service.
There is a lower fee for that compared with, say, comprehensive holistic type of advice. And members can typically also have that fee deducted from their superannuation.
Rob: Oh, that's handy.
Rob: So is there a number of options there for people looking for different levels of advice?
Trevor: Absolutely. And look, even if a member's just speaking to one of our staff, you know, at UniSuper call centre or as I mentioned, our on-campus consultant, those staff can help members understand what sort of advice they do need, if any. And in some cases, members won't actually need personal advice or the timing might be right.
Perhaps they want to wait till they're closer to a timing or in a position where perhaps their circumstances settle down a bit. Maybe they're in a new job for example, or they started a family and the time might not be right as well. But all of our staff can help guide members in that area.
Marta: So going back to the different sort of levels, we've got the general advice where they can kind of give us a call or go speak to an on-campus consultant face-to-face at their work. And then they can...or they can call in to the financial advice centre or the FAC, as we like to call it here. What kind of topics can members call us about?
Trevor: Yeah, so look, for our simple advice service, which we call select advice, there are a range of topics relating to members' superannuation accounts that we can help them with. The main topics are advice around their contributions, so we can help them with their contribution strategy for the current financial year. And then that comes down to the members' goals.
For some members, it's maximising their concessional contributions, which is before tax contributions. For other members, it's looking at how can they increase their net pay, for example. So we can actually personalise a strategy and make recommendations. In that regard, we can also help members invest their super in a way that's appropriate for them, so that they understand how much risk they're taking on.
So if there are any changes in terms of the performance of the different markets, members aren't sort of caught out and caught trying to make decisions at the wrong point in time, we can help them with a long term investment strategy.
Trevor: And another area that we've seen more and more advice coming through on is insurance. So actually, insurance is through UniSuper. So particularly members who have perhaps just purchased a home or gotten married or planning to have a family and children, just reviewing their insurance level is to ensure that they are adequately insured.
Marta: Cool. And is there any...are there any new areas that we're sort of dipping our toe in in that space?
Trevor: Yeah. The next area for the select advice service is looking, I guess, beyond superannuation into investments outside of super.
Marta: Oh, wow.
Trevor: So for particularly for members who have say, surplus cash flow, where they can look at regular investments into a non-super investment. And that could be around goals such as perhaps buying your first home or planning to save for children's education, where we can help them to save outside of super. And look, with contribution caps coming down, this will be a more and more of a need going forward as well, that members will need to look, in some cases, outside of superannuation for appropriate investments.
Rob: Fantastic. And when do you envisage that to be launching to our members?
Trevor: This will be launching in the next few months.
Marta: That's exciting. I think it kind of...it will probably help members sort of get a more holistic view of their finances in general. So not just isolating their super in one bucket and thinking about it separately, but thinking about your sort of wealth, for want of a better term, as a whole, which I think might be quite useful.
Trevor: Absolutely, Marta. And look, we've talked about some of the simple advice through the select advice service. And also as members, I guess, as they get closer to retirement, we do have our comprehensive advice service as well through our private client advisers, where they can give members holistic financial planning advice around retirement planning and beyond as well.
Marta: Yeah. Cool.
Rob: And of course if anyone wants to contact our advice centre, what is the number, Trevor?
Trevor: The number is 1300 331 685.
Marta: Excellent. Thanks very much.
Trevor: Thanks for having me.
Marta: So that brings us to the end of this episode of Super Informed Radio. Thanks everyone for sticking around.
Lyndon: And if you have any questions or want more information about anything you've heard today, please feel free to get in touch with us, firstname.lastname@example.org is the email address there. And we'll see you next time.
Marta: See you.