A Client-Centered approach to Financial Planning Practice built by Research for Practitioners
The second in the CFP Board Center for Financial Planning Series, Client Psychology explores the biases, behaviors, and perceptions that impact client decision-making and overall financial well-being.
This book, written for practitioners, researchers, and educators, outlines the theory behind many of these areas while also explicitly stating how these related areas directly impact financial planning practice. Additionally, some chapters build an argument based solely upon theory while others will have exclusively practical applications.
- Defines an entirely new area of focus within financial planning practice and research: Client Psychology
- Serves as the essential reference for financial planners on client psychology
- Builds upon and expands the body of knowledge for financial planning
- Provides insight regarding the factors that impact client financial decision-making from a multidisciplinary approach
Table of Contents
Acknowledgments xi
Preface xiii
Charles R. Chaffin, EdD, CFP Board Center for Financial Planning
About the Contributors xix
CHAPTER 1 Client Psychology 1
Charles R. Chaffin, EdD, CFP Board Center for Financial Planning Jonathan J. Fox, PhD, Iowa State University
References 9
CHAPTER 2 Behavioral Finance 11
Swarn Chatterjee, PhD, and Joseph Goetz, PhD, University of Georgia
What Is Behavioral Finance? 12
Applications of Behavioral Finance in Understanding and Changing Clients’ Behavior 14
Summary 16
References 17
CHAPTER 3 Understanding Client Behavior: Rational or Irrational? 19
Swarn Chatterjee, PhD, and Joseph Goetz, PhD, University of Georgia
Bounded Rationality 19
Sunk Cost Fallacy 22
Flat Rate Bias 23
Summary 23
References 24
CHAPTER 4 Heuristics and Biases 25
Jodi Letkiewicz, PhD, York University
System 1 and System 2 26
Heuristics 27
Bias Reduction 34
References 39
CHAPTER 5 Decision-Making under Risk 43
HanNa Lim, PhD, Kansas State University
Expected Utility Theory 43
Violations of Expected Utility Theory 44
Prospect Theory 46
Effects in Prospect Theory 51
Implications for Research and Practice 55
References 62
CHAPTER 6 The Role of Mental Accounting in Household Spending and Investing Decisions 65
C. Yiwei Zhang, PhD, and Abigail B. Sussman, PhD, The University of Chicago Booth School of Business
Mental Accounting as Categorization 66
Methods for Categorizing Funds 67
Budgeting 73
Implications for Investing 82
Concluding Remarks and Future Research 86
References 89
CHAPTER 7 Intentional Choice Architecture 97
Michael J. Liersch, PhD
Are You an Intentional Choice Architect? 98
Principle 1: Humans Have Limitations 101
Principle 2: Humans Use Reference Points to Make Decisions 103
The Choice Architect’s Opportunity 106
The Case for Intentional Choice Architecture: Retirement Savings 107
Plan Participation, Deferral Rates, and Default Investment Options 110
From Awareness to Action 114
References 116
CHAPTER 8 Cognition, Distraction, and the Financial Planning Client 119
Nils Olsen, Vanessa G. Perry, and Zhuo Jin, George Washington University
Influences on the Frame of Mind 120
Emotion, Stress, and Touch 122
Choice and Cognitive Overload 125
Visual Portrayal of Data 126
Losses and Gains 127
Cognitive Resource Depletion 127
Implications for Financial Planning Professionals 130
References 133
CHAPTER 9 Personality and Financial Behavior 137
Sarah D. Asebedo, PhD, CFP®, Texas Tech University
Models of Personality 138
The Relationship between Personality and Financial Behavior 139
Openness to Experience 140
Conscientiousness 141
Extroversion 142
Agreeableness 144
Neuroticism 145
Connecting Personality to Financial Behavior through Theory 147
Personality Measurement 148
Implications for Research and Practice 149
Future Direction 150
References 151
CHAPTER 10 Risk Literacy 155
Meghaan R. Lurtz, MS, and Stuart J. Heckman, PhD, CFP®, Kansas State University
Berlin Numeracy Test 156
Risk Literacy and Financial Planning 160
Conclusion 161
References 162
Appendix 164
Berlin Numeracy Test for General Population 164
Berlin Numeracy Test for Educated Population 165
CHAPTER 11 Automated Decision Aids: Understanding Disuse and Designing for Trust, with Implications for Financial Planning 167
Jason S. McCarley, PhD, Oregon State University
Mechanical versus Holistic Judgment 168
Algorithm Aversion and Automation Disuse 170
Trust in Automated Systems 172
Conclusion 176
References 177
CHAPTER 12 Self-Determination Theory and Self-Effi cacy in Financial Planning 181
Charles R. Chaffin, EdD, CFP Board Center for Financial Planning
Self-Determination Theory 182
Self-Efficacy 184
References 186
CHAPTER 13 Marriage and Family Therapy, Financial Therapy, and Client Psychology 189
Kristy Archuleta, PhD, and Sonya Britt-Lutter, PhD Kansas State University
Marriage and Family Therapy 190
Family Systems Theory 191
Financial Therapy 195
Building Alliances with Families and Couples 196
Referrals and Collaborations 198
Conclusion 200
References 200
CHAPTER 14 Client Diversity: Understanding and Leveraging Difference to Enhance Financial Planning Practice 203
Quinetta Roberson, PhD, Villanova University
Understanding the Concept of Diversity 204
The Business Value of Diversity 209
Leveraging Client Diversity 211
Practice Perspectives 213
Conclusion 218
References 218
CHAPTER 15 Client Psychology: The Older Client 221
Deanna L. Sharpe, PhD, CFP®, CRPS®, CRPC®, University of Missouri
Introduction 221
Age-Related Changes in Brain Structure and Function 226
Aging and Economic Decision-Making 233
Concerning Signs 237
Supporting Older Clients 239
Research Challenges 242
Final Thoughts 245
References 246
CHAPTER 16 Financial Psychology 253
Bradley T. Klontz, PsyD, CFP®, Creighton University Faith Zabek, MEd, Georgia State University Edward Horwitz, PhD, CFP®, Creighton University
Financial Psychology 254
Financial Psychology for Financial Planners 259
Motivational Interviewing Techniques 261
Conclusion 265
References 266
CHAPTER 17 Money Disorders and Other Problematic Financial Behaviors 271
Edward Horwitz, PhD, CFP®, Creighton University Bradley T. Klontz, PsyD, CFP®, Creighton University Meghaan Lurtz, MS, Kansas State University
Literature on Money Disorders and Related Financial Behaviors 273
Addressing Money Disorders and Related Financial Behaviors 278
Case Studies 280
Overspending and Compulsive Buying Disorder 280
Financial Denial or Avoidance 282
Financial Enabling and Dependency 283
References 285
CHAPTER 18 Situation Awareness in Financial Planning: Research and Application 289
Charles R. Chaffin, EdD, CFP Board Center for Financial Planning John Grable, PhD, CFP®, University of Georgia
Perception 292
Comprehension 293
Prediction 294
Future Directions 298
References 299
CHAPTER 19 Final Remarks 301
Charles R. Chaffin, EdD, CFP Board Center for Financial Planning
References 304
Index 305
