NEW YORK — Advisers hoping to convince clients that they need a long-term financial plan should do their best to appeal to the prefrontal cortex of their clients’ brains — and steer clear of the limbic system altogether.
“The prefrontal cortex — the analytical part of the brain that controls contingency planning — is what differentiates us from lower life forms,” said David Laibson, an economics professor at Harvard University in Cambridge, Mass., who specializes in the link between investment decisions, and physiological and psychological factors.
The limbic system, on the other hand, is emotional — it is a procrastinator that lives for the moment, he added. It is the part of the brain that prefers immediate lump sums rather than the promise of long-term security, Mr. Laibson noted.
Most people are unaware of the part of their brain that seeks instant gratification and avoids long-range planning.
In fact, according to to a survey of 1,000 people conducted by
Prudential Financial Inc. of Newark, N.J., only one-third believed that their emotions affected their investment decisions. “The role emotions play in investment and retirement decisions is being recognized as an important factor in creating a successful retirement,” said David Odenath, president of Prudential’s annuity division, which in May released the report summarizing the findings.
Age has an effect
Mr. Laibson’s research is being used by firms to understand why many clients are not saving enough for retirement. “Many insurers don’t understand the underlying neural basis for client decisions,” he said.
Aging brains can be even more resistant to planning.
“Functional [magnetic resonance imaging] research with the aging brain shows that it tends to filter out negative messages,” said Maureen Mohyde, director of the corporate-gerontology group of The Hartford (Conn.) Financial Services Group Inc. Older people screen out pitches based on scare tactics such as becoming destitute in retirement, she noted.
“Everyone thinks they will die in their sleep — that’s why they often refuse to buy long-term-care insurance,” said Jacqueline Marcell, a nationally recognized elder-care advocate in Irvine, Calif. Many of her clients refuse to discuss — even with their own families — the possibility of needing a nursing home, she added.
But some think that negative imagery must be used to stir clients into action.
People do not want to think about unpleasant scenarios, noted Moshe Milevsky, a professor of finance at York University in Toronto. That is why we need advisers to “camp out at people’s kitchen tables and hit them over the head and alert them to the importance of planning for a negative,” he said.
Annuities are an especially tough sell because they fly in the face of the limbic system’s desire for control and abhorrence of delayed enjoyment, Mr. Laibson said. People crave being in control of their assets — to buy and sell, and re-balance their portfolios, freely, he added. “So handing that control over to an insurance company in exchange for the promise of a future income stream makes annuities unappealing to them,” Mr. Laibson said.
Older people are intimidated by the planning process because they feel that there are too many variables that make the process unknowable and uncertain, Ms. Mohyde said. For instance, they may become upset when asked to plug an inflation rate into a calculator that will show how much they should save for retirement. “They want an adviser or coach who will answer such questions — not ask them,” she added.
Jury still out
Mr. Milevsky said that he has yet to see any definitive research in which a control group of people with smaller limbic systems relative to their prefrontal cortex were shown to be more amenable to
financial planning or purchasing insurance products.
No one knows if client reactions to planning or certain insurance products are from life experiences or changes in the brain, Ms. Mohyde said. “There has been no conclusive research.”
“These theories are still unproven and untested,” Mr. Laibson said. “The limbic system and prefrontal cortex are not like New Jersey and Pennsylvania — there aren’t boundaries so you can tell where one stops and the other starts,” he said. But there is an “ongoing dialogue” between the emotional and analytical parts of the brain, Mr. Laibson noted.
