Policy-Based Financial Planning as Decision Architecture

Since the 1970s, psychologists and economists have discussed the heuristics that typify people's “automatic system” of thinking, including the cognitive biases that can arise from these mental shortcuts. In more recent years, researchers in behavioral finance have also proposed ways to harness heuristics and biases in order to “nudge” individuals in the direction of better decision-making.Financial planners must often work to overcome the heuristics and cognitive biases that can lead clients to make poor financial decisions or fail to act on good ones.Policy-based financial planning, first proposed by Hallman and Rosenbloom (1975) and later developed by Yeske and Buie (2006), involves the formulation of compact decision rules that can support rapid decision-making in the face of changing external conditions. Policy-based financial planning can also be conceptualized as a form of “choice-architecture” as proposed by Thaler and Sunstein (2008).A six-step process for developing financial planning policies is offered, along with several examples of policies covering different areas of financial planning. A set of safe-withdrawal policies is also analyzed in terms of the elements of good choice architecture