Looking at human rationality is fundamental to unlocking the potential of pensions, according to behavioural economist Paul Craven.
Speaking at the Workplace Pensions Live 2016 conference on 12 May, the former Goldman Sachs head of European institutional business said he is concerned that bias features heavily in the financial industry, particularly in decision-making.
One issue is confirmation bias where debate plays little part in a decision. This is fuelled by people trying to find evidence that supports their theories and filtering out things they do not agree with, according to Craven.
The financial industry also shows bias through the ‘bandwagon effect’, a tactic where people follow others’ lead in decisions, which he said could be detrimental for business.
Ways to avoid these various biases on a big decision is through the ‘blank sheet of paper approach’, by weighing up the pros and cons of a decision.
Use of nudge tactics is another potential solution to help people make decisions, which could help persuade agreement with the logical choice. It would help those involved in pensions to make much more balanced decisions and come up with some insightful ideas, he said.
A key part of this is the phrasing of questions as well as distinguishing the difference between price and value.
“Pensions are about real people in the real world and it doesn’t work like other economics,” said Craven.
“Our psychology determines our behaviour – we all make mental shortcuts – and understanding this gives a major advantage in evolving business.
“We need to educate people more widely and in pensions we need to communicate better. Some of these techniques can help people make the right decisions.
“Being aware of our own biases and how we deal with those through our interactions is important,” he added.