A Client-Centered approach to Financial Planning Practice built by Research for Practitioners

The second in the CFP Board Center for Financial Planning Series,Client Psychology explores the biases, behaviors, and perceptions that impact client decision-making and overall financial well-being.

This book, written for practitioners, researchers, and educators, outlines the theory behind many of these areas while also explicitly stating how these related areas directly impact financial planning practice. Additionally, some chapters build an argument based solely upon theory while others will have exclusively practical applications.

CHARLES R. CHAFFIN, ED.D., is Director of Academic Initiatives at the CFP Board Center for Financial Planning. He is Executive Editor ofFinancial Planning Review, the academic journal from the CFP Board Center for Financial Planning. In addition, he leads the Academic Research Colloquium and the Columbia University?CFP Board Teaching Seminar and serves as editor of the CFP Board Center for Financial Planning Series. He is a published researcher with a multitude of papers that focus on the cognitive workload of learners in different task settings, reflective practice, and best practices in higher education curriculum and instruction, both within education as well as within financial planning. He has taught all levels of learners, from elementary school, baccalaureate, graduate, and doctoral studies through a variety of instructional platforms. He holds a graduate degree from the University of Michigan and a doctorate from the University of Illinois at Urbana-Champaign.

Acknowledgments xi

Preface xiiiCharles R. Chaffin, EdD, CFP Board Center for Financial Planning

About the Contributors xix

CHAPTER 1 Client Psychology 1Charles R. Chaffin, EdD, CFP Board Center for Financial Planning Jonathan J. Fox, PhD, Iowa State University

References 9

CHAPTER 2 Behavioral Finance 11Swarn Chatterjee, PhD, and Joseph Goetz, PhD, University of Georgia

What Is Behavioral Finance? 12

Applications of Behavioral Finance in Understanding and Changing Clients Behavior 14

Summary 16

References 17

CHAPTER 3 Understanding Client Behavior: Rational or Irrational? 19Swarn Chatterjee, PhD, and Joseph Goetz, PhD, University of Georgia

Bounded Rationality 19

Sunk Cost Fallacy 22

Flat Rate Bias 23

Summary 23

References 24

CHAPTER 4 Heuristics and Biases 25Jodi Letkiewicz, PhD, York University

System 1 and System 2 26

Heuristics 27

Bias Reduction 34

References 39

CHAPTER 5 Decision-Making under Risk 43HanNa Lim, PhD, Kansas State University

Expected Utility Theory 43

Violations of Expected Utility Theory 44

Prospect Theory 46

Effects in Prospect Theory 51

Implications for Research and Practice 55

References 62

CHAPTER 6 The Role of Mental Accounting in Household Spending and Investing Decisions 65C. Yiwei Zhang, PhD, and Abigail B. Sussman, PhD, The University of Chicago Booth School of Business

Mental Accounting as Categorization 66

Methods for Categorizing Funds 67

Budgeting 73

Implications for Investing 82

Concluding Remarks and Future Research 86

References 89

CHAPTER 7 Intentional Choice Architecture 97Michael J. Liersch, PhD

Are You an Intentional Choice Architect? 98

Principle 1: Humans Have Limitations 101

Principle 2: Humans Use Reference Points to Make Decisions 103

The Choice Architects Opportunity 106

The Case for Intentional Choice Architecture: Retirement Savings 107

Plan Participation, Deferral Rates, and Default Investment Options 110

From Awareness to Action 114

References 116

CHAPTER 8 Cognition, Distraction, and the Financial Planning Client 119Nils Olsen, Vanessa G. Perry, and Zhuo Jin, George Washington University

Influences on the Frame of Mind 120

Emotion, Stress, and Touch 122

Choice and Cognitive Overload 125

Visual Portrayal of Data 126

Losses and Gains 127

Cognitive Resource Depletion 127

Implications for Financial Planning Professionals 130

References 133

CHAPTER 9 Personality and Financial Behavior 137Sarah D. Asebedo, PhD, CFP®, Texas Tech University

Models of Personality 138

The Relationship between Personality and Financial Behavior 139

Openness to Experience 140

Conscientiousness 141

Extroversion 142

Agreeableness 144

Neuroticism 145

Connecting Personality to Financial Behavior through Theory 147

Personality Measurement 148

Implications for Research and Practice 149

Future Direction 150

References 151

CHAPTER 10 Risk Literacy 155Meghaan R. Lurtz, MS, and Stuart J. Heckman, PhD, CFP®, Kansas State University

Berlin Numeracy Test 156

Risk Literacy and Financial Planning 160

Conclusion 161

References 162

Appendix 164

Berlin Numeracy Test for General Population 164

Berlin Numeracy Test for Educated Population 165

CHAPTER 11 Automated Decision Aids: Understanding Disuse and Designing for Trust, with Implications for Financial Planning 167Jason S. McCarley, PhD, Oregon State University

Mechanical versus Holistic Judgment 168

Algorithm Aversion and Automation Disuse 170

Trust in Automated Systems 172

Conclusion 176

References 177

CHAPTER 12 Self-Determination Theory and Self-Effi cacy in Financial Planning 181Charles R. Chaffin, EdD, CFP Board Center for Financial Planning

Self-Determination Theory 182

Self-Efficacy 184

References 186

CHAPTER 13 Marriage and Family Therapy, Financial Therapy, and Client Psychology 189Kristy Archuleta, PhD, and Sonya Britt-Lutter, PhD Kansas State University

Marriage and Family Therapy 190

Family Systems Theory 191

Financial Therapy 195

Building Alliances with Families and Couples 196

Referrals and Collaborations 198

Conclusion 200

References 200

CHAPTER 14 Client Diversity: Understanding and Leveraging Difference to Enhance Financial Planning Practice 203Quinetta Roberson, PhD, Villanova University

Understanding the Concept of Diversity 204

The Business Value of Diversity 209

Leveraging Client Diversity 211

Practice Perspectives 213

Conclusion 218

References 218

CHAPTER 15 Client Psychology: The Older Client 221Deanna L. Sharpe, PhD, CFP®, CRPS®, CRPC®, University of Missouri

Introduction 221

Age-Related Changes in Brain Structure and Function 226

Aging and Economic Decision-Making 233

Concerning Signs 237

Supporting Older Clients 239

Research Challenges 242

Final Thoughts 245

References 246

CHAPTER 16 Financial Psychology 253Bradley T. Klontz, PsyD, CFP®, Creighton University Faith Zabek, MEd, Georgia State UniversityEdward Horwitz, PhD, CFP®, Creighton University

Financial Psychology 254

Financial Psychology for Financial Planners 259

Motivational Interviewing Techniques 261

Conclusion 265

References 266

CHAPTER 17 Money Disorders and Other Problematic Financial Behaviors 271Edward Horwitz, PhD, CFP®, Creighton University Bradley T. Klontz, PsyD, CFP®, Creighton University Meghaan Lurtz, MS, Kansas State University

Literature on Money Disorders and Related Financial Behaviors 273

Addressing Money Disorders and Related Financial Behaviors 278

Case Studies 280

Overspending and Compulsive Buying Disorder 280

Financial Denial or Avoidance 282

Financial Enabling and Dependency 283

References 285

CHAPTER 18 Situation Awareness in Financial Planning: Research and Application 289Charles R. Chaffin, EdD, CFP Board Center for Financial Planning John Grable, PhD, CFP®, University of Georgia

Perception 292

Comprehension 293

Prediction 294

Future Directions 298

References 299

CHAPTER 19 Final Remarks 301Charles R. Chaffin, EdD, CFP Board Center for Financial Planning

References 304

Index 305