research

Impressed by numbers: the consumer bias towards precise numerical information in a context of uncertainty

A TFI research project by Eleonore Batteux, Avri Bilovich, Samuel Johnson, David Tuckett
Posted on April 01, 2021

Investing is never an easy decision to make. Many financial institutions provide forecasts to make investing a little easier for customers, and to give them an estimate to their returns. But, do precise forecasts attract investors by misleading them into believing returns are more certain than they are? In this TFI research project, Eleonore Batteux, Avri Bilovich, Samuel Johnson and David Tuckett investigate the extent to which people, who usually have little investment experience, are drawn to and over-rely on precise investing predictions, and how it plays into their decision-making process.

Summary

Uncertainty is an inescapable feature of financial decision making. Fluctuations in our society have a constant impact on the financial system, particularly recently in the face of rapid changes. This makes financial outcomes impossible to accurately predict. The more precise the financial forecast, the more likely it is to be wrong. Despite this, consumers often get precise financial projections. If they take that precision at face value, it might mislead them into believing that future returns are more certain than they actually are. Consumers might therefore be attracted to precise forecasts for the wrong reasons.

The allure of precision

In our TFI research project, we investigate the extent to which consumers are drawn to precise forecasts when feeling uncertain. Although previous research has shown that consumers often suffer from a bias towards precise rather than round numbers,1 findings are less consistent when it comes to comparing precise and vague outcomes.2 To start with, we test how precise forecasts affect consumer confidence and behaviour in an investment context. We then explore interventions to alleviate a potential bias towards precision, both from communications in the field and interventions derived from the literature. We aimed to find out how consumers make incentivised hypothetical investment decisions.

Our studies were conducted with about 2,000 participants from the general population, who mostly had little to no investment experience. To test whether consumers are drawn to precise forecasts, we conducted two experiments in which we showed participants a series of investment funds associated to forecasts of annual growth, communicated with either precision (e.g. 3%) or vagueness (e.g. 1% to 5%). Our participants indicated how much of £5,000 they would invest in each fund. Afterwards, we presented them with one fund with a precise forecast, and another one with a vague forecast, asking them to indicate their preference.

In the first experiment, participants preferred precise forecasts, investing more in these. In the second experiment, we included both narrow and wide ranges, measuring how confident participants felt about their investment. We found that participants invested most in precise forecasts and had most confidence when doing so, whereas they invested least in wide ranges and had least confidence when doing so.

Next, we tested interventions designed to increase consumers’ awareness of the uncertainty associated with financial investments, in order to alleviate the bias towards precise forecasts. We first tested whether financial disclosures common in the field can increase consumers’ awareness of uncertainty in a way that makes them suspicious of precise forecasts. We tested disclosures of potential losses and expected growth not being guaranteed against a control, but neither alleviated the bias for precision. This suggests that consumers are drawn to precise forecasts, even when told they are misleading.

We then tested whether experiencing the limitations of precise forecasts is more effective. Before investing in a fund, we let participants experience its past forecasts and actual performance. This allowed them to see that precise forecasts are often not realised. This time, participants did not invest more in funds with precise rather than vague forecasts. Under the right circumstances, consumers are able to see the limits of precise forecasts.

When precision disappoints

Although precise forecasts might be confidence-inducing at the point of investment, confidence may be shattered and trust in forecasters eroded when forecasts are not realised. Any incorrect forecast might be disappointing, but we expect precise forecasts to be even more disappointing, given that consumers might have higher expectations of them, experiencing more dissatisfaction if incorrect.3

Therefore, we investigate the effects over time of communicating precise forecasts which turn out to be wrong. First, we look at the effects on trust and loyalty towards providers. Indeed, trust in financial providers is particularly important for consumers when investing.4 Second, we look at the effects on consumers’ confidence in their investment and how likely they are to sustain their investment. This is particularly important considering that consumers can pull out of their investments at times which are not in their best interest.

We used a method similar to the first set of studies, but with a different task: participants invested £5,000 in a fund and were given either precise or vague forecasts by their investment management firm. They then witnessed their investment’s monthly growth, which in both cases ended up much lower than the forecasted growth (although still positive).

In a first experiment, consumers were less likely to trust their investment management firm after an incorrect precise forecast. This was partly because the precise forecast was perceived as less reliable, but more so because the firm was perceived as more intentionally misleading. This in turn made consumers more likely to change investment firms.

In a second experiment, we tested how willing consumers were to sustain their investment after incorrect forecasts. Although consumers reported fairly low confidence in their investment and leaned towards pulling out, the precision of the forecast did not affect this. This suggests consumers blame the forecaster for incorrect precise forecasts rather than the investment itself. We confirm this in a third experiment in which consumers were more likely to change investment management firms but not investment product after incorrect precise forecasts.

Communicating forecasts to consumers

Our findings show that consumers are drawn to precision in an investment context: it boosts their confidence. Although precision might encourage consumers to invest, we suggest they are drawn to providers for the wrong reasons. Contrary to what consumers might think, precise forecasts are rarely realised and not necessarily indicative of a provider’s success. This is problematic because consumers might believe that their investment returns are more certain than they actually are. If they turn out to be incorrect, overly precise forecasts can disappoint consumers. Not only can precise forecasts let consumers down, they can also lead to less favourable judgments of financial providers. This is concerning at a time when trust in financial services is already low.5 Consumers might not lose confidence in their investment per se following incorrect certain forecasts, but they do lose confidence in the forecaster. Communicating with overly precise forecasts might initially attract consumers, but it is likely to backfire for providers in the long run.

Policy ought to protect consumers from providers who attract them with overly precise financial projections. Current regulations do stipulate that financial disclosures which signal uncertainty should be provided, however our findings show that these do not adequately inform consumers and protect them from misleading information. Consumers are still drawn to precise forecasts when told future returns are uncertain. We recommend that forecasts which are overly precise given the uncertainty should not be communicated.

In addition, financial disclosures should be reformulated and presented in a way that will increase consumers’ understanding. Financial disclosures have been made more effective in the past,6 suggesting more could be done to ensure that they communicate uncertainty more effectively. This would ensure consumers are better equipped to cope with the uncertainty prevalent in financial markets and beyond.

Summary guidelines

  • Avoid overly precise forecasts. Consumers are drawn to precise forecasts as they provide confidence and certainty, albeit a false sense of certainty. A precise forecast that turns out to be wrong can backfire for communicators, who lose credibility and trustworthiness, thereby compromising consumer loyalty.
  • Word disclosures carefully. Even if forecasts are qualified by verbal disclosures, consumers often pay more attention to the numbers and still take their precision as a signal for certainty. Disclosures which are salient and meaningful to consumers have a greater impact6.
  • Acknowledge uncertainty. Imprecise forecasts are more effective at communicating uncertainty and maintaining trust and loyalty if incorrect. However, ranges can be difficult to interpret. Explaining why there is uncertainty can help consumers understand it and have more realistic expectations.

References

  • 1. Thomas, M., Simon, D. H. & Kadiyali, V. The price precision effect: Evidence from laboratory and market data. Mark. Sci. 29, 175–190 (2010).
  • 2. Onay, S., La-Ornual, D. & Onculer, A. The effect of temporal distance on attitudes toward imprecise probabilities and imprecise outcomes. J. Behav. Decis. Mak. 26, 362–374 (2013).
  • 3. Oliver, R. L. A cognitive model of the antecedents and consequences of satisfaction decisions. J. Mark. Res. 17, 460 (1980).
  • 4. NMG Consulting. The motivations, needs and drivers of non-advised investors. Financ. Conduct Auth. (2014).
  • 5. Edelman. Edelman Trust Barometer 2020. (2020). doi:https://www.edelman.com/trustbarometer
  • 6. Feddersen, M. et al. Choosing wisely : comprehension and the financial promotions for investment products. FCA Res. Notes (2020).