Hosts Jordan Haines and Reese Harper discuss insights from their recent webinar, examining how comparing oneself to peers can drive financial behavior change. Learn about the limitations of probability of success metrics and explore effective strategies for motivating clients by using comparative data. This episode offers valuable perspectives for financial advisors aiming to enhance client engagement and support better financial outcomes.
01:28 Probability of Success vs. Social Comparison
04:28 The Role of Social Comparison in Financial Advice
10:21 Using Data to Motivate Behavioral Change
13:58 Challenges and Solutions for Younger Generations
19:23 Concluding Thoughts and Next Steps
Transcript
Jordan Haines: Welcome to Elementality everyone. I’m coming at you this week. I want to share part of a conversation that Reese Harper and I had, um, a couple of weeks ago. When we recorded a webinar. Um, you can catch the recording in the show notes of the full conversation, but I wanted to post a snippet of today’s conversation about the first 20 minutes or so, where recent I talk [00:01:00] about. The difference between using probability of success to drive decisions versus using something like social comparison drive decisions. There’s lots of unconventional wisdom here. Uh, that recently we’ll talk about. And I’m interested to bring this to you.
If you have any thoughts or comments, please feel free to share them. Um, post them on LinkedIn or Twitter or wherever you’re hanging out. And feel free to email me. Otherwise let’s get on the conversation between Reese, Harper and myself.
To kick off the conversation today, Reese, this is a question for you to just kind of guide the discussion.
What are the effects that you’ve experienced of using the probability of success or articulating future projections in client interactions?
Reese Harper: I want to talk just. First, uh, to answer this about the, I mentioned social comparison theory earlier, um, it was, uh, it was researched by someone named Leon Fessinger in 1954.
Uh, you can look at, you know, you can [00:02:00] see, look it up online and read a little bit about it. I’ll summarize it by just, Saying that the theory here is that people naturally assess their own abilities and opinions, um, against others when no objective measure is available. Um, and this. Tendency to compare ourselves, uh, to the world around us plays a huge role in self evaluation, um, and our own behaviors of what we’re going to prioritize.
And it’s super important inside of a financial context, like financial advice, when people are constantly trying to understand their own financial standing relative to other people, because that’s the only way that they can do it. Like, absent some other medium, right, absent some other, uh, objective measure, you can only look around you and in the world you know, and decide if [00:03:00] you’re in the middle, or doing okay, doing a little better, doing a little worse, and, and, I think when we, Like probability of success could be useful if we were maybe socializing it in a comparative way and comparing it to peers, you know, but it’s, it’s, it’s not usually in my experience, it hasn’t been as useful for younger people.
Um, because it’s not that objective. Uh, it’s quite objective, I think for someone in retirement or at retirement. Uh, or close, especially the closer that we get to terminal life, uh, our terminal life expectation in our projections, the probability of success becomes, I think, more practical. Um, but I don’t find it to be very motivating for most people, especially further.
They get [00:04:00] away from their retirement date in their accumulation years. It becomes much more. Difficult to find value in it. And it’s just because there’s so many variables that are not objective, um, that aren’t. trustworthy, um, and the consumer knows that and the advisor knows that. And so it kind of cheapens the, the value of the probability of success, the further you get away from, um, withdrawal.
Uh, that’s my, that’s kind of how I would look at it. Jordan,
Jordan Haines: would you say Reese that when judging success, I mean, comparison is probably the primary way we judge success comparing to others, comparing to a probability success number, comparing to a projection. Would you agree with that statement? Success, uh, judging success is from comparison.
Reese Harper: Yeah, I mean in, uh, the other theory that, yes, the 1949 theory, uh, Relative Income Hypothesis, um, that I mentioned earlier, it’s, I mean that, [00:05:00] the whole point of that one is, um, That you can, you can see how people are comparing their peer group income rather than their own income. People compare their income and that’s how they understand if it’s good.
Um, they don’t really know if it’s good based on their own situation. It’s just hard to know, uh, until you
Jordan Haines: compare. I can feel, I can feel the like the advisor side of me saying, well, I don’t want my clients to compare themselves to other people. I think some of us have probably been in the situation where clients are coming to us and they’re saying, well, I’m not as good off as this person, or I’m doing way better than this person when really we want to compare them to their own personal situation.
How do you, how do you true that up though, Reese? I think what you’re saying is that maybe, maybe the social comparison is more natural. And if we can lean into that in some sort of way that that’s going to be more effective with clients. Is that what you’re saying? Yeah. Absolutely.
Reese Harper: I’m just, I think that’s a good, that’s a one, one, one idea that I think is valid.
Um, I’m just saying that’s the way they’re doing it. Yeah. Like, I’m not [00:06:00] saying that’s the right way to live your life. I’m just saying people compare themselves. Especially when it comes to their money, you know, because there isn’t an objective way alternatively. And that’s kind of the genesis of why we created elements was we wanted to create an objective way to measure, um, an objective way to look at your own situation and not compare yourself.
However, I think what we’ve tried to, what we were hoping and what we’re seeing at least in, uh, the limited experience that we have, uh, over the last few years is that the social comparison side of personal finance is what causes people to get engaged and dig in and they care a lot more if you can present the information in a way that is socially relevant and, uh, Especially if you can get down into their occupational vertical or their income level and their age and make it be very [00:07:00] relevant.
The more relevant you can make the social comparison, the more motivating it is. I mean, if I’m an, let’s say, let’s take an example and say I’m an iOS developer. Well, comparing myself to salaries of all iOS developers is going to be much more motivating than comparing myself to. All software engineers generally, the more specialized I can get with my comparison, the more likely it is to to be a proxy that I trust.
And then I can take action from that. So if you tell me, I need to save more that’s in the context of. opinion You a financial advisor saying save more if you tell me to save more Because i’m in the bottom quartile of my peer group now I’m a little more interested, but i’m going [00:08:00] to say who’s my peer group and who are you comparing me to and what’s that?
What is that? Set of people how many kids do they have and what age are they and where do they live? And do they live in california like me or they live in north dakota their people naturally will start to dig And so the better peer comparison you have, the more it starts to feel objective. People are looking for objectivity.
That’s what they’re really looking for. They’re not looking to, like, feel better than other people. They’re not looking to feel grandiose or feel shame. They just want information. So they use social comparison absent another objective. Uh, measure in order to make a decision about whether they’re making enough, whether they’re saving enough, whether they have a big enough house, whether they drive the right cars, whether they take the right vacations.
Now, financial advisors can change that perception, but I don’t think it changes the consumer’s intuition. They’re still going to, according to, [00:09:00] um, a variety of, You know, academic research, they’re still going to use social comparison as a way to get validation or take action. And so I think we underutilize social comparison as an industry.
I don’t want to use it to create shame or create, uh, unnecessary, like, grandiosity or pride so that someone stops changing their behavior. I want to use it to sort of provide objectivity. And then allow the person to make a decision that moves them in a positive direction.
Jordan Haines: It’s really interesting. That led perfectly into this question.
You already answered this question. What motivates people to take action and change their behavior? I think a lot of advisors. What did you hear from this? Yeah, well, I said what you heard. There was one, there was one word that you said that I think really stood out to me. And that is that I think oftentimes in the minds of consumers, of our clients, of the prospects that we work with, oftentimes what we say can come across as an opinion.
Right? Like, it feels like an opinion about my personal life. It’s hard for me to base my, my next step, [00:10:00] my behavior on someone else’s opinion. That feels scary. I mean, many of you have been in a situation where either you’ve been to a health professional or a consultant or someone like that, and they give you something, and maybe if they don’t articulate it well enough or don’t give you the reason why or the comparative data as to why you need to do that thing, it can feel like an opinion.
And it’s kind of scary for me to want to do anything with that. So what the sense that I’m getting from you Reese’s comparative data is, yes, it’s another thing to compare ourselves against, but people are naturally inclined to do that. And if we can provide very specific. Um, comparative data to that client to benchmark their success or how they’re doing right now, then it becomes a little bit easier for them to take what we say, not as an opinion, but as something that’s a pretty good suggestion for them.
Do you feel like I’m capturing what you’re saying? Yeah,
Reese Harper: exactly, man. If you want behavioral change, um, if you want to motivate someone’s behavior, that they’re looking for. objectivity so that they [00:11:00] can decide if it’s really important for them to make a decision. Sometimes I, like, let’s say I’m talking to a, uh, a, an 18 year old who is thinking about going to college.
If I just share my opinion, like you should go to college, it was very helpful for me. And I tell them all of that information, they’re going to be less likely to take action if they’re, if they already have a bias against college. But if I present them with information from the last three years, and I say, people at the age of 24 who graduated from college across the U S have an 18 percent higher gross income than people who didn’t go to school.
Do you want to go to college? It’s just a different analysis. Now I’m giving them the data of their relevant peer sample today. All the inflation is baked in, all [00:12:00] of the competition is baked in, all the stories they have about, you know, losing, um, ground, uh, to AI is baked in because I’m showing them a relevant, and a relevant comparative sample.
And now it has more power. I think financial advisors too often rely on their own. Opinion. It’s a good opinion. Usually most financial advisors are pretty well informed, better informed than most consumers, but that’s not a very persuasive argument. I just think we have to use data as a way to motivate behavioral change.
It’s much more effective. And there’s so much academic research to prove that. And what we’ve done in the past with our financial planning processes, I think we’re largely influenced by the asset center management and roll over IRA, uh, kind of industry of the, you know, nineties and early two thousands.
We were [00:13:00] motivating people to give us their, their assets were motivating people to give us their money and to roll over their IRAs. And so we had to show them that our plan was going to last, it was going to make it all the way through retirement. But we weren’t talking to, we weren’t solving root cause behavioral finance problems.
We were still managing assets for retirees. I’m, I think this problem is really a root cause problem of people don’t have good financial habits at a young age. How do we get them there? By showing them the average financial habits of their peers and then inviting them to do a little better than what their average peer group is doing.
If the average peer group is saving 5 percent of gross income at age 26, And we, we just need to show them that data and then they will, they will increase their savings deposit.
Jordan Haines: I think that’s really interesting there. There was a couple of comments. I want to ask you some questions recently. I want to get your reaction to these.
Jordan Haines: isn’t a big part of the problem with [00:14:00] probability of success, not looking all that great to you, the younger you are, that the portion of the population living or willing to live within their means compared to the past few generations, I think comparison in this sense is part of the problem.
Okay. What do you think about that?
Reese Harper: I don’t think that’s how young people think right now. I mean, I think that’s a good, that’s a good insight. It’s possible. I think younger people think they’re in a very different situation. Inflation, uh, competition, um, right. Like concentration of liquidity in the top, you know, 2 percent of America.
Uh, rising incomes. If your income is at 250, 000 a year right now, you’re rising at 5 to 7 percent a year. If your income is like 60, 000 a year, your income is rising at 5 to 7%. Just under 1 percent a year, uh, inflation is like, these are the younger generation has different problems. So I would present them with data that is objective so that they can see how they’re doing [00:15:00] right now relative to people just like them who are in their same situation.
And that way they go, they don’t, they don’t. Don’t discount your story. Don’t create a story. Just show them the data and change.
Jordan Haines: You’re not advocating for like here. Here’s all this data. I’m going to disappear now and let you make your own assumptions about this information, right? I think the scary thing for me as advisor is to say, here’s all this data about everyone.
I’m going to let you compare yourself and I’m going to let you make that judgment and I’m not going to provide any observations or thoughts around that. I don’t think that that’s what you’re advocating for. I think that you’re still saying advisor. You can still come in and say, Hey. Look at this data, here’s what I make of this.
Here’s what, how we apply that to your situation. Let’s move forward. As advisors often do. Would you agree with that?
Reese Harper: Yes. Yeah. I, I just, I think we, I think there are root cause behaviors that we’re not addressing with younger generations. Their root [00:16:00] cause issues, like how much they spend is a factor. Like what JP said, like that’s a, some people spend more than others and we need to have an objective way of showing them that, right?
So burn rate is the percentage of your gross income that you spend. If we could trust that we had an objective set, a small set, even 30 people, something statistically relevant to that person’s age and income level, and we knew the spending data was accurate, that would have a bigger motivation on someone’s willingness to cut their spending than any projection of the future.
By like a mile. Same thing with savings. Same thing with debt to income ratios. Same thing with square footage of your home. If you’re trying to encourage conservatism, the best way to do that is just disclose the data set that’s relevant to that person. And everyone will try to be at least a little bit better than what the [00:17:00] median or average point is.
But if I think solving for someone’s goals is just a very different type of financial advice. And we need that too. Like, do, can you fund a goal? That’s different than are you saving a similar or higher or lower amount than your peer group, um, as you accumulate towards retirement or in retirement. Let’s say, let’s just say we started using peer group in retirement.
You have a 50 year old, um, two 50 year olds, two 60 year olds, two 70 year olds. Um, when we say I can retire, a lot of people are saying I can retire now because their probability of success says X, says X. But people are retiring with very different levels of wealth total term score that we track Some people retire with a total term score of 40 some 30 some 25 some 20 at the same age That’s [00:18:00] just a that’s a risk profile Question, you know more than it is retirement readiness question.
Uh, and so I just think it’s interesting to disclose the data, show people how they look compared to a relevant peer group and see how they react to that information. Cause you learn, you, you learn a lot and you motivate them to action quicker.
Jordan Haines: I think that’s interesting cause it reorients me as the advisor.
Away from this future probability of success, this future projection, because I can’t compare that’s like apples and oranges, I can’t go from one client to the other and compare their probability of success and their situation. There’s too many variables. There’s too many assumptions. There’s too many things that we’re incorporating into that.
But if I am comparing current reality, basic measurements, things like savings rates. Um, like levels of liquidity as it relates to their spending, uh, you mentioned total term, which is net worth to spending as a ratio. How many years can you live off your net [00:19:00] worth? If I’m comparing those. current reality type measurements, it becomes a lot easier for me to start to run that comparison and have it actually be meaningful and impactful to people rather than comparing people to this like future income state and you know what’s going on there.
, so
Reese Harper: let’s, I would love to, uh, I would love to hear what, um, Johnny was thinking about on this because he’s been so
Jordan Haines: Hey folks. It’s Jordan. I thought I’d end it here because for the rest of the webinar, we hear some stories from Johnny, how he’s using elements. I will link in the show notes to this webinars. So you can watch the full recording. It’s about 50 minutes long. I thought this first part of the conversation was probably the most valuable part of it.
At which recent I discussed the value of social comparison. Now I mentioned this last week in the recording, we released then. About how we can use comparison for good. And I just want to reiterate that here and reflect on that a little bit more. I think there’s such a strong natural [00:20:00] tendency for us human beings to compare ourselves. And so many times I hear people, especially advisors. Say that they don’t want their clients comparing themselves. And while I would agree with that. I think clients. Just naturally do this. Is there a way that we, as financial advisors can use that natural tendency. For the good of clients. That’s something that I don’t know. But I have lots of ideas for, so let’s stay too.
And I’m sure we’ll talk about this a lot more. Otherwise, we’ll see you all next week.