First Impressions Matter: An Experimental Investigation of Online Financial Advice
Individuals in today’s world have to make many complex financial decisions. Examples are deciding on credit card debt repayment, choosing funds with low costs, picking stocks for their retirement portfolios as well as consolidating several retirement savings accounts. Given that financial literacy is rather low, many people use financial advisers to make their decisions. But how do individuals decide on which financial advice to trust? Can they distinguish between good and bad advice? Are individuals influenced by first impressions and catering towards their interest at first? Agnew et al. (2016) answer these questions by analysing data from incentivised experiments, done with a representative sample of Australian citizens.
Agnew et al. (2016) find that financial advisors who display a credential are more likely to be chosen, independent of the quality of the advice. Overall, the likelihood to be chosen is reduced by 63 percentage points for advisors who give bad advice. With topics labelled as easy (such as credit card repayment), advisers are penalized when they deliver bad advice. When the adviser gave bad advice on the difficult decision to pick the index fund with a low fee structure, however, individuals chose that adviser more often than the adviser with the correct advice. Financial literacy as well as past experience with the topic mitigates this effect. The authors furthermore find that the first impression matters. A first good-quality advice with an easy topic (i.e. a topic that the individual believes to understand) increases the adviser’s competence rating as well as the likelihood to be chosen later on, even when the advice given then is of bad quality.
This study might be useful for practitioners interested in the construction of quantitative risk-management models. It sheds light on how to hedge against stock market inefficiencies following an under-reaction to information about prolonged droughts especially since the findings show that PDSI might be a very useful metric of drought to build portfolios and manage risks.