Behavioural science can benefit accountants. Here’s how.

By Gary Anders

In their 1979 paper Prospect Theory: An Analysis of Decision Under Risk, psychologists Daniel Kahneman and Amos Tversky determined that people often made irrational decisions based on inherent biases around potential gains and losses.

The research, which later earned Kahneman a Nobel Prize in Economics (Tversky passed away before it was awarded), helped spur the creation of a new branch of behavioural science known as behavioural economics.

Over time, it has changed the way many financial advisers deliver advice to their clients.

By having a greater understanding of the psychology behind investors’ judgements and decision-making, advisers can use that knowledge in a practical sense to help their clients dispel bias and make informed decisions aimed at achieving better financial outcomes.

Dr Paul Moran, principal at Melbourne-based Moran Partners Financial Planning, recalls a meeting he had with a couple many years ago at which he was attempting to explain the differences between a term deposit and a managed fund.

“I explained all about diversification and I realised that every time I used the word shares, they crossed their arms and sat back in their chairs,” says Moran. 

“After a while not being successful, I stopped using the word shares and instead I started referring to big Australian companies like the Commonwealth Bank and Telstra. They were completely fine after that.”

Moran later completed a doctorate of business administration, with his thesis focused on behavioural financial decision-making.

“When clients reject advice, it is often for lots of reasons,” he says. “If you understand what those reasons can be, it is easier to frame statements in a better light that gets your message across and builds trust, which makes it more likely for clients to accept your advice.”

Improve client financial decision-making

Just as behavioural economics is now widely leveraged in financial advice, it is also increasingly being used by accounting firms to help them influence client decisions and outcomes, design better processes and change organisational behaviours.

PwC Australia offers a range of services based around behavioural economics. 

“You can’t force people to be more rational, but by recognising and anticipating cognitive biases using behavioural science and data analytics, you can design targeted, cost-effective interventions that nudge people toward better decisions and behaviours,” notes PwC.

Deloitte is another of the big firms offering specialist behavioural services to Australian companies.

 

"A lot of the decision-making biases that come out of the research are sort of beyond your conscious awareness — you’re not aware that you’re making an error. If you were aware, you wouldn’t be doing it."

 

“Our digital tools, specialist practitioners, and global network of academic relationships enable us to practically apply the best of behavioural science to more effectively drive business outcomes,” the firm states on its website.

Deloitte says its tools have been designed to “identify target behaviours and understand organisational and psychological barriers to those target behaviours”, and to quickly shift behaviours through gamification and digital nudges.

Simon Russell, founder and director of Behavioural Finance Australia, also works with a range of financial advice firms, superannuation funds and asset managers to deliver behavioural finance and related decision-making programs, to help them improve their own decisions, actions and outcomes.

“A lot of the decision-making biases that come out of the research are sort of beyond your conscious awareness — you’re not aware that you’re making an error. If you were aware, you wouldn’t be doing it,” he says.

“But other people can see our biases and our problems, so it is about finding the right avenue to direct the sort of the education, training and assistance that can be provided.”

Making accounting advice easier to act on

Most accountants know the pain of waiting for client documents that never arrive. But procrastination is often a sign that clients are struggling to act.

Behavioural science suggests that people are far more likely to act when the initial step is small, clear and easy to take.

Behavioural money coach Karen Eley, founder of Women Talking Finance, says accountants have a hidden “superpower” amid the rapid growth of artificial intelligence (AI) solutions — the power of human connection.

“No person, no client, is going to connect with AI, but they are going to connect with you and your firm. That can never be replaced. To differentiate yourself and provide a different, more innovative service offering is to have a look at, well, how can you connect with your clients on a deeper level?

“It really does come down to our habits, our behaviours and emotional triggers that we have around decision-making, and helping them navigate and improve that.”

Eley believes behavioural science knowledge can benefit accountants in a number of ways.

“Accountants as well as financial advisers should be spending more time understanding behavioural science to build it into the types of things they do, whether it is advising people or whether it is just applying it across their own organisations or businesses,” she says.

Applying behavioural science in finance

Framing matters more than most people realise, Moran notes, as clients can respond differently depending on how information is presented.

He says that, in an accounting sense, there is often a tendency to talk with clients about what happened last year, whereas clients typically prefer to talk about what is going to happen in the coming year.

“Discussing what happened last year should only be a starting point to move to future thinking. This increases the likelihood of clients accepting your advice and setting goals.

“It is about perceptions of past performance versus expectations of future performance. When you frame a scenario to a client based on past performance, they tend to be overly optimistic,” Moran says. 

“When you frame it based on their expectations of the future, they start to become more rational, more in line with what the reality is.”

 

"A lot of our patterns and dynamics around money are unconscious. Accountants have a unique opportunity to bring that to their clients’ conscious awareness. You can put a cash flow projection or a budget in front of someone, but if they have inner dynamics that are resisting that, they are not going to take action and do it. So you actually need to understand, what is the block there?"

 

Eley says that while accountants traditionally focus on financial strategies, the work in behavioural science focuses on the humans using those strategies. 

“A lot of our patterns and dynamics around money are unconscious. Accountants have a unique opportunity to bring that to their clients’ conscious awareness.

“You can put a cash flow projection or a budget in front of someone, but if they have inner dynamics that are resisting that, they are not going to take action and do it,” she says. “So you actually need to understand, what is the block there?”

This is where a behavioural approach can help accountants, Eley notes.

“There are two sides to our relationship with money. One is the practical things that traditionally accountants have worked on. But the other side of the coin is your relationship with money, which is about how you think about it and your behaviours. 

“Accountants can explore that internal relationship in order to reach some of the financial goals and success that they’re wanting their clients to achieve.”