Are We Talking the Same Language?

The financial services industry, like the medical industry, the marketing industry, and the automotive industry, all have their their unique shorthand terms and abbreviations that are clear to insiders, but confuse and obscure understanding for outsiders. It’s called ‘the curse of knowledge.’ Jane Kennedy defines the curse of knowledge as “a cognitive bias that occurs when an individual, communicating with other individuals, unknowingly assumes that the others have the background to understand.”

Two of my favorite authors, Chip and Dan Heath, brothers and professors at Stanford and Duke Universities respectively, have written several books on how to communicate ideas in a way that ‘sticks’ and leads to action. In a 2006 Harvard Business Review article they address the fundamental reason why so many sensible CEO strategies fail, laying the blame squarely on the curse of knowledge. The Heath’s point out that when communicating their ideas, CEOs tend to use sweeping, general language like; “Achieving customer delight!” “Becoming the most efficient manufacturer!” “Unlocking shareholder value!”

The reason according to the Heaths is that “top executives have had years of immersion in the logic and conventions of business, so when they speak abstractly, they are simply summarizing the wealth of concrete data in their heads. But frontline employees, who aren’t privy to the underlying meaning, hear only opaque phrases. As a result, the strategies being touted don’t stick.” The Heaths referred to the following study to illustrate the problem:

“In 1990, a Stanford University graduate student in psychology named Elizabeth Newton illustrated the curse of knowledge by studying a simple game in which she assigned people to one of two roles: “tapper” or “listener.” Each tapper was asked to pick a well-known song, such as “Happy Birthday,” and tap out the rhythm on a table. The listener’s job was to guess the song.

Over the course of Newton’s experiment, 120 songs were tapped out. Listeners guessed only three of the songs correctly: a success ratio of 2.5%. But before they guessed, Newton asked the tappers to predict the probability that listeners would guess correctly. They predicted 50%. The tappers got their message across one time in 40, but they thought they would get it across one time in two. Why?

When a tapper taps, it is impossible for her to avoid hearing the tune playing along to her taps. Meanwhile, all the listener can hear is a kind of bizarre Morse code. Yet the tappers were flabbergasted by how hard the listeners had to work to pick up the tune.

The problem is that once we know something—say, the melody of a song—we find it hard to imagine not knowing it. Our knowledge has “cursed” us. We have difficulty sharing it with others, because we can’t readily re-create their state of mind.”

Experts in and consumers of financial services suffer the same challenges, and then some. There are dozens of sub-industries within the financial services industry, each with its own set of complex strategies and terminology. There are RIAs, brokers, insurance agents, mortgagers, mutual funds, exchange traded funds, hedge funds, 401Ks, Roths, SEPs, annuities, pensions, just to name a few – each with its own mind numbing jargon and raisons d’etre (reasons for existing).

Financial experts are called upon to describe complex topics to their customers and clients many times a day, so often in fact that they might easily be forgiven for occasionally falling into ‘financial-ease’ short-cuts. But when these lapses occur, the expert has wandered from his or her primary mission; which is to seek first to understand and then to be understood (as Stephen Covey reminds us), to gain commitment to a strategy, and ultimately to motivate appropriate action.

It is difficult to overstate the importance of good communication and understanding in financial matters. Perhaps the lack of it explains why so many people in the wealthiest country on the planet do so poorly managing their wealth. Advisors all too often assume their clients understand them and their clients all too often proceed with a woefully incomplete understanding. Ultimately their commitment falters and they bail on that strategy to chase another.

We have talked about Beacon 3.0 a few times in recent Briefs. In 3.0, our aim is to make financial planning more understandable, impactful and fun. Out next rollout will be our new quarterly investment reports, coming next week. Our goal for the reports as with 3.0 is to provide our clients with a concise, comprehensive, and easy-to-understand review of all of your assets and how they have performed. Please let us know what you think. Working together we hope to eradicate ‘curse of knowledge’ by speaking and understanding the same language.