Cognitive Design

 According to leaders in behavioral finance (scientific study of how cognitive biases shape our economic decision making) the answer is NOT that we don’t make enough money.  Instead, the reason we fail to save is that we are not cognitively wired to do it. I have a number of biases that block savings behaviors including:

1. an aversion to risking or giving up current gains (so I don’t want to commit  any of my current income to a regular savings program)
2. a strong belief that I will save more tomorrow (so that I don’t need to save today) and other faulty mental models
3. underestimating the value of a resource in the future (I cannot wrap my brain around the time value of money so I am not swayed by the logic of saving soon and often)
4. a strong visceral factor that drives me to maximize consumption in the present (it is hard to delay gratification)
5. an aversion to thinking about being old and eventually dying.  

These are very powerful (often overwhelming) effects that lead to poor decisions and inaction. And it gets worse- the design of the products makes it very hard (intellectually and emotionally) to consume them:

· The products are complex so I have to do a lot of mental work to understand and use them (very high cognitive load) this decrease the relative motivation to participate, triggers a mental state of procrastination and leads to inaction

·  small print and legal jargon can invoke feelings of doubt.

In short, retirement products and services don’t fit the way we think and feel so we tend not to consume them appropriately despite the fact that it is in our best interest to do so. 

Actually, they score 1 out of 5  (at the very bottom) in terms of cognitive fit and literally agitate cognition rather that support or enhance it. The design of retirement and saving products and services is an area of big opportunity for cognitive designers.  And there has been a lot of action: Pension plans that literally let you save more tomorrow by allocating a portion of future earnings (you avoid having to part with anything today and it plays off of the fact that you undervalue future resources), credit cards that allow you to spend and save for retirement at the same time, pension plans that automatically enroll employees and require them to opt out if they don’t want to participate (having the status quo bias work in our favor), 401k plans that come with services that pick specific funds for you to invest in (lower cognitive load) and so on.  We will cover all these products and the research that drives them in this blog.

You might complain that you don’t design financial products or services so what can you learn from this? Look at the list of biases again.  They (or very close variants of them) are involved in the customer or employee cognition around almost every type of product or service that involves behavior change. So if you are in the behavior change business the lessons learned should be useful to you. 

Lottery tickets are one of the best examples of cognitive design that we have.  After all, they have transformed something consumers hate to do (pay taxes) into a multi-billion dollar form of entertainment.  The design features and why they work  (leverage cognitive biases, low cognitive load, high visceral impact, etc.) will be covered extensively in this blog. 

For many buying a lottery ticket is an easy thing to do. It gives a sense of hope and momentary excitement that is sometimes shared with friends.  These are powerful mental states – hope, excitement and connection all for a dollar or two!  If that is what consumers really want when they buy a lottery ticket then they pay off every time.

The information design of financial products and services is very sensitive to the cognitive biases of consumers. A great example of this is the payment/interest rate bias.   Because of this bias most of us will tend to underestimate the interest rate on a loan when we are given information about the monthly payment and duration – or the stream of payments we have to make to repay the loan.

So in practice, we tend to take higher interest rate loans if we are only (or mostly) shown information on monthly payments and duration.   A  study  by two business professors from Dartmouth show just how far this effect can go:

 ”Firms provide frames that cater to bias, and biased consumers sort into different contracts than unbiased consumers. This leads to segmentation across firms in how they present information to consumers, which customers they attract, and equilibrium prices”.

 The market segments by cognitive bias!

 This effect was found, according to to study, in non-banking lending practices only. 

Systematic bias in perception, memory, interpretation and reasoning is a key aspect of cognition. These biases are used to explain seemingly irrational behavior (e.g. buying a lottery ticket), improve decision making (e.g. training against the “beautiful works well” bias in hiring), the design of financial products (I will save more tomorrow) engineering safety procedures,  crafting magic tricks, developing advertising messages and a host of other applications.

Designing to enhance and support cognition (or cognitive design) means understanding and managing (i.e. overcoming or paternalistically leveraging)  the cognitive biases at work in your design.   To get an idea of the cognitive biases that may be impacting the effectiveness of your design check out the great list on Wikipedia.