What attracts investors’ attention impacts their decisions. As humans, we can only process so much information – so we focus on what catches our eye. That’s why people have been found to invest based on noise in the news, high trading volumes, attention-grabbing information or advertising.
Today, advised clients receive a range of reports containing data and charts. How are they interpreting those charts? Where does their attention fall, and how does that impact their decisions? Consumer Duty makes this a pressing question.
Research shows that investors place great emphasis on past performance when making future decisions – hence the inclusion of the mandatory past performance warning. We all know that a period of strong returns tells us nothing about the future, nor is it relevant to a client’s long-term plan. However, clients must be shown performance charts, particularly during their annual reviews. Finding out how they view and act on that information helps us drive better understanding in the future.
The ‘eyes’ have it
Eye-tracking technology monitors eye movements during decision-making processes, providing insight into how we process information before making a choice. It’s been used in many disciplines, including to understand how players anticipate where a football will land or how medical professionals detect lesions in mammograms.
In collaboration with Mark Pittaccio (Quilter), Dr Eugene McSorley and Dr Rachel McCloy (University of Reading), we used the technology to explore eye movements and decisions of experts and non-experts when interacting with past performance charts. A total of 60 participants were categorised into three groups – students, clients and experts – based on their background and experience.
Participants were fitted with an EyeLink II tracker headset to monitor their eye movements while they viewed charts depicting one year of hypothetical performance. They viewed a variety of graphs with both negative and positive returns, some with a benchmark and some with only portfolio performance. For each graph, they answered about what they would do in the situation and how they felt. Would they stay invested? Did they feel concerned about what the chart showed?
What we learnt is that how clients view and interpret performance charts differs in some important ways from how a professional might see the same charts. Clients relied significantly more on recent performance than experts and students, spending more time and making more visits to the past two months and the Y axis of performance charts.
They made even more visits to the past two months when they were provided with a benchmark – and this was true whether returns were positive or negative. The availability of a benchmark for performance comparison appears to be very important for clients, helping them to decide whether to remain invested and affecting their views on the future of their investments. However, it’s possible that paying too much attention to the benchmark and to recent performance could distort decisions.
In the blink of an eye
The addition of a benchmark led participants to spend more time, make more fixations and visits to regions where more contextual information was provided – such as the key and the performance box. In contrast, when no benchmark was visible, more time was given to the Y axis – that is, without the context of a benchmark, participants were more inclined to focus on their absolute return.
This was borne out in the responses to the questions about intentions, which showed the presence of a benchmark reduces participants’ likelihood to stay invested. However, this was only when they had experienced positive returns, as the added contextual information provided incentives for attempting to time the market. When performance had been negative, benchmarks reduced feelings of concern.
The presence of a benchmark also increased the complexity of the charts for non-experts, with both students and clients requiring more time to make a decision when a benchmark was shown. Clients in particular spent a great proportion of time fixating on latter periods of their annual performance due to the ability to make comparisons. This suggests the presence of a benchmark and its endpoint acts as an anchor on which judgements of relative value are made and on which subsequent decisions are based.
How can we use these findings? Benchmarks and portfolio values are factual representations of what has actually happened, but they are often presented without context of the client’s own financial objectives and whether or not their financial plan is ‘on track’.
Knowing how clients interpret performance charts – and how that might differ from your conclusions if you look at such charts every day – can help us, as an industry, to provide contextual information that would support better understanding, better decisions and better outcomes, something Dynamic Planner continues to do in order to improve our outputs and ensure consumer understanding.
Dr Louis Williams is head of psychology and behavioural insights at Dynamic Planner
This article originally appeared in the May issue of Portfolio Adviser magazine
