Markus Schuller
The Knowing-Doing Gap in Behavioral Finance
Markus Schuller, Founder Panthera Solutions Foto: Panthera Solutions
Why do professional investors talk about behavioral finance more than they apply its insights to achieve more rational decision making?
The Sludge Factor
“Sludges” are among the most common applications of behavioral insights. These destructive nudges attempt to persuade us to consume products and services that we neither need nor want.
©Panthera Solutions
Sludges exploit our reliance on intuition- or instinct-driven heuristics. If our short attention span is not guided towards more rational thinking, we subconsciously repeat our routines. System theory and cybernetics call this “autopoiesis,” which refers to a system that can reproduce and maintain itself. Autopoiesis distinguishes between cognition and consciousness since we may not be aware of the foundation on which we make our decisions.
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The Sludge Factor
“Sludges” are among the most common applications of behavioral insights. These destructive nudges attempt to persuade us to consume products and services that we neither need nor want.
©Panthera Solutions
Sludges exploit our reliance on intuition- or instinct-driven heuristics. If our short attention span is not guided towards more rational thinking, we subconsciously repeat our routines. System theory and cybernetics call this “autopoiesis,” which refers to a system that can reproduce and maintain itself. Autopoiesis distinguishes between cognition and consciousness since we may not be aware of the foundation on which we make our decisions.
If changes are introduced unconsciously through our limbic system, we may adapt to the new normal without being aware of any change. This occurs naturally when we seek “normality” and establish routines that enable autopoiesis. This “below radar” adaptation can even lead to “unethical amnesia,” wherein we misremember our ethical lapses to protect ourselves from the internal distress that they might evoke. Part of our brain wants to avoid ambiguous and complex situations, whether they are caused by external factors or ourselves.
Empowerment is unnecessary if the goal is to only temporarily change someone’s behavior. Simply arouse the limbic system and our instincts will respond and immediately adapt our behavior. We can even impose change against someone’s will.
But that doesn’t create an empowered decision maker capable of creative and critical thinking, only an assimilated one.
Can we expect lasting behavioral change when such a change is imposed? Probably not. Once the source of arousal fades, so too does the need for an immediate response. Though over time we develop fight-or-flight response patterns that do initiate enduring behavioral changes. This is why sludges still work even when we know better.
Empowering an individual over the long term requires a more conscious form of development. And it starts with storytelling. “The only way a person can change is if they change the story they tell themselves about themselves,” James Hillman, the founder of archetypal psychology, observed.
This can be a litmus test to determine if an intervention might increase empowerment. And it turns out, that simple interventions methods like disclosures, traditional education like seminars or keynote speeches, and nudges are all ineffective when it comes to empowering the individual.
Source: Greg Davies, Centapse; modified by replacing “knowledge” with “empowerment.”
As a consequence, the standard change model for an individual can be characterized as dysfunctional. It is defined as follows:
A clear goal + a careful action plan + monitoring of our behavior toward that goal + willpower = successful change
The dysfunction is rooted in two unrealistic assumptions:
- That we can consistently apply our willpower.
- That we can succeed by directly changing our problematic behaviors into desired behaviors.
A more conscious form of development must address both assumptions.
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