This paradoxical effect known as “argument dilution” was examined in financial products by Niro Sivanathan, associate professor at London Business School (LBS) who led the research, working with Hemant Kakkar, also of LBS.
Counter intuitively, the academics suggest isolating key risks gave clients a better understanding of the hazards, which is particularly relevant given the drive towards transparency in financial services communications.
The study involved over 3,000 people and reveals that to aid understanding of complex information or risk, narrowing it to the primary risk factors affords better understanding than a long list of both primary and secondary risks.
Following a series of financial mis-selling scandals, this research – though focused on presenting risk information among pharmaceutical drugs – has particular implications for the UK’s financial services industry and the growing need for transparent consumer communications.
“Paradoxically, we found evidence that when a long list of risks were provided, typically mixing trivial with serious factors, individuals’ judgement of the overall risk was diluted and it even helped the marketability of the product,” said Sivanathan.
He explained: “In our studies, consumers’ reduced judgement meant they perceived these products as more appealing, more effective and were even willing to pay more for such items.
“This suggests that the very laudable desire for transparency is inadvertently counter-productive. So to help consumers accurately process information, the old adage of ‘less is more’ holds true.
“Therefore, when communicating risk associated with complex financial products – for example, pensions, endowments, loans, mortgages, personal contract plans and so on – individuals can more readily grasp the real risk if the serious factors are identified and separated from the more minor concerns.
“This approach nudges people’s attention to the salient issues while also covering minor factors and hence fulfilling the need for transparency.”
Ask your adviser
Sivanathan notes that while regulators and compliance teams strive to ensure financial promotions are clear, fair and not misleading, consumers can also help themselves: “Be sure to ask your adviser to identify the key risks to help you make an informed decision. And before committing, you need to be confident that you are aware of the primary and most serious risks associated with a product.”
The authors argue that the research – which was based on the US pharma sector, and specifically the FDA requirement to list all risk factors pertaining to a drug – has important implications for the UK financial services industry.
Both sectors emphasise the need for transparency when trying to explain complex information regarding risk to consumers and so research which suggests the best way to convey such messages is valuable.
About the research
The research explored the responses of 3,059 individuals in direct-to-consumer advertising for medications in the US where each specific side effect must be listed. Responses to both auditory and visual adverts were assessed over the course of six studies.
These investigations examined situations where medication had a chance of causing a variety of complications ranging in severity from life-threatening to comparatively trivial.
The authors compared consumers’ reactions to adverts that included both serious and non-serious adverse risks with consumers’ responses to adverts where only the serious risks were shown.